Cryptocurrency Regulations: A Ruse Or An Essential To Decentralized Finance?

The concept of crypto regulation has been a controversial subject matter that crypto enthusiasts and regulators have debated and are still constantly discussing until now. Many wonder if DeFi could exist with regulations and remain tagged "decentralized." The premises of these debates aren't precisely far-fetched, as it could be said that crypto regulations might hinder innovations, going against the true essence of cryptocurrencies: decentralization at its core.

On the flip side, experts advise that regulation in the cryptocurrency industry could be a significant contributing factor to risk management, bringing in more investors and bigger money to this asset class. It's an infinite feud, and we can say that all parties have valid points, but with the restrictions and limitations accompanying cryptocurrency regulations, could it be said that this phenomenon is all but a ruse threatening to cause more damage to the already volatile crypto market of today? Let's find out.

Regulations In The Cryptocurrency Market

The perfect place to start talking about regulations in the crypto market would be taking a trip back to 2016, when Japan became the first country to initiate restrictions on crypto exchanges due to hacks and the massive Mt.Gox theft, where 850,000 BTC were stolen. This occurrence showed how detrimental lax security measures or zero regulations could be for the crypto asset class.

Japan established a regulation requiring registrations of virtual currency exchange platforms(VCEP) with the authorities in the region. One would think that occurrence would incur a paradigm shift in the cryptocurrency market. Still, it wasn't so, as many regulators didn't feel the need to instigate regulations in the overall market.

However, the regulatory scenario for cryptocurrencies today has taken a different turn, as the clamor for regulations is almost deafening. Legal authorities are making moves to instigate laws on tax requirements, crypto company registrations, strict requirements for stablecoins, transaction information on exchanges above $1000, and many more.

With the mainstream adoption of cryptocurrencies, and a potential increase in the risk, volatility, rug pulls, and theft, one could say there is indeed a cause for alarm. However, enthusiasts believe these regulations are majorly being instigated as a means for governing bodies to control DeFi just like they do over centralized finances.

The Downsides

Many believe that regulations would do more harm than good as they could destroy the uniqueness that cryptocurrency and the blockchain have over already existing financial systems. These laws would assert control over the network, allowing FIAT currencies to remain the dominant monetary system globally.

Regulations would also eliminate the transparency and anonymity of cryptocurrencies. These two significant factors have remained the network's rare value proposition being a network uncontrollable by centralized authorities. Regulations could mean the permissionless system would need as much permission as any centralized financial system.

Privacy Coins

One sector in the cryptocurrency system that would take a considerable fall in the wake of regulations is privacy coins. These cryptocurrencies protect user information during transactions, providing as much anonymity as possible. These cryptocurrencies are great for protecting your transaction information from the general public, but they can be easily exploited in cases of illicit or fraudulent activities.

To combat the criminal marketplaces propelled by privacy coins, regulators have placed privacy coins under scrutiny. Japan has outright outlawed privacy coins, while Australia and South Korea have all barred exchanges from accepting them. There is a particular concern about privacy coins like Monero (XMR) and ZCash (ZEC), which are already restricted on several exchanges. With regulatory supervision at its peak, it is unarguable that these cryptocurrencies may not survive a full-fledged regulated regime in the ecosystem.

The Tornado Cash Saga

The tornado cash saga highlights the regulation issues in a way that makes people ponder where we should draw the line. On the 8th of august, the US department of treasury's Office Of Foreign Assets Control(OFAC) sanctioned Tornado cash, a popular Ethereum-based virtual currency tumbler, after a series of allegations that the system has constantly been used to launder money. However, it didn't stop there. On the 10th of August, on suspicion of "involvement in covering up unlawful financial transactions and enabling money laundering," the Dutch government arrested a 29 yr old developer of Tornado Cash, Andrew Pertsev.

The U.S.Treasury Department stated that over the last three years, Tornado Cash had been used to launder over $7 billion in digital assets. In addition, the authorities claimed that a north-Korean-sponsored hacking group, Lazarus, had control of over $455 million from this sum. Tornado Cash was also used to hide over $96 million in illegal proceeds from the Harmony Bridge hack in June and $7.8 million from the Nomad robbery this month.

While all of these allegations might have been true, it is also clear that bad actors exploited the Tornado cash network to carry out illicit criminal acts. Tornado cash is a protocol, a permissionless system that even the creators do not have control over. And might we add that the network is still used for a wide range of lawful transitions? Hence, many see no reason for the arrest of the developer. The Dutch government has not released any comments on the grounds of the arrest, nor the exact rules Pertsev broke to be arrested.

With Tornado cash addresses being flagged, Pertsev's arrest, and a significant price crash in the network, this occurrence has caused enthusiasts to voice their displeasure over how the authorities handled the matter, stating that this signifies a bleak future for the web3 system. If cases of other protocols being used for illicit activities occur, would the solution be to flag user accounts and arrest their developers? What would regulations entail in the web3 system? Unsanctioned arrests of developers and obscene violations of human rights?

Where Do We Draw The Line?

According to data, only 0.34% of cryptocurrency transactions are illegal, which is less than the prevalence of illicit activity in the conventional banking system. As a new technology still in its growth phase, the cryptocurrency market might still be very volatile. But, there is no certainty that regulations would eliminate illicit activities if they are still quite dominant in the traditional system.

Regulating the DeFi system is an issue of concern for enthusiasts, and regulators might have to consider more flexible approaches that do not involve unprecedented arrests, sanctions, and enforcement of stringent laws on decentralized systems. A clear, constructive, and flexible framework would be most appropriate, particularly in creating the groundwork for long-term innovation and transparency that allows users, creators, and businesses to profit from the potential advantages of the system securely.

Will Regulations Benefit The Crypto Market?

Now to answer the question of whether or not there are some benefits to this. Crypto regulations have disadvantages, but experts believe they could benefit the ecosystem in several ways, including mass adoption, innovation, and encouraging long-term investors to join the network.

Mass Adoption

One of the advantages that could come with the regulation of cryptocurrencies is mass adoption. Despite the evolution of blockchain technology, many still believe that the asset is too volatile and risky and cannot be considered the ideal investment venture. A regulatory framework in this system may encourage increased adoption, making users feel safer investing.

Currently, the crypto market class is 1.04 trillion dollars, a relatively low price compared to other asset classes like the stock and real estate markets, which are over 93.7 and 3.8 trillion dollars, respectively. Of course, these assets have been around earlier, but regulations played a significant role in their global adoption and could do the same for cryptocurrencies.

Long-term investors

It is impossible to overstate how crucial transparency is for institutional investors. Since institutions are built around risk management, each investment must have a risk profile. Only regulated assets can be used to create these systems, which cryptocurrencies aren't presently.

Regulation could encourage more innovators and companies to invest in the sector if they feel more secure or backed by some law and order. If properly targeted, more regulatory advice could reduce crypto asset speculation. Increased investor confidence brought on by less speculative activity may entice additional long-term investors to join the system.

Security

Although this particular factor is heavily being debated because regulations in CeFi haven't done much in reducing the percentage of fraudulent activities, experts say that proposed frameworks such as tracking transactions pegged at a certain amount or preventing non-registered networks from launching are factors that could help reduce scams and fraudulent activities within the ecosystem.

Takeaway

While the clamor for decentralization continues to be on the rise, the truth remains that the blockchain ecosystem is relatively new, even after being around for more than a decade. Perhaps we must begin with a semi-decentralized network before moving into a full-fledged permissionless system.

With non-stop demand for some order in the cryptocurrency market, crypto regulation is a function of "when" and not "if," and perhaps it wouldn't be as detrimental to the ecosystem if Governmental organizations could achieve a delicate balance on all sides. And that includes a transparent and precedented system without biases and equal priorities on consumer protections and innovation.