Is Regulation Really Needed in the Crypto Space?

Regulation is currently one of the most trending topics within the cryptocurrency industry. But it is also something that has plagued the space since the very beginning. The core ethos of cryptocurrency is that it was designed to be regulation-resistant and self-sustaining. This is the underlying principle of Bitcoin, the first cryptocurrency.

There are other arguments that lean towards the idea that regulation of some kind is needed in the crypto sphere, and this makes sense in the face of so many hacks and scams. The problem, unfortunately, lies in the fact that existing regulations are unworkable.

To anybody involved in cryptocurrency and has even a basic knowledge, the legislative proposals are simply unenforceable from a technical perspective. The regulators don’t seem to understand the industry at all and are asking for the impossible.

The Impracticality of Crypto Regulations

At the time of this writing, the CFTC is gearing up to become the top crypto regulator in the US. They recently fined a Decentralized Autonomous Organization (DAO) in the first-ever case of its kind. The statement read:

“Margined, leveraged, or financed digital asset trading offered to retail U.S. customers must occur on properly registered and regulated exchanges in accordance with all applicable laws and regulations. These requirements apply equally to entities with more traditional business structures as well as to DAOs.

This is worrying news to many in the industry as DAOs are supposed to act autonomously of third parties but are now being interfered with. Aside from what could be construed as an overreach of power by centralized authorities, however, there are more pressing concerns.

For regular traders and investors, it is practically impossible to comply with regulations that deal with microtransactions. Imagine you invested $10,000 worth of Bitcoin in 2014. That BTC, over the years, could have been converted to another 100 different cryptocurrencies, all with varying prices.

These transactions would have occurred on different platforms, many of which may now be extinct. Many of these cryptocurrencies would even have received staking rewards, which is a form of interest on crypto deposits.

Put simply, it is not feasible for a regular investor (let alone a trader) to account for all of the price increases. And that is precisely what the existing legislation is asking for. It could easily lead to a crypto revolt - given the impossibility of reporting, people are likely to not report at all, simply because the regulators have not been in any way realistic in their policy drafting.

Regulation and Crypto Staking

Staking is a decentralized finance (DeFi) mechanism where users are rewarded for staking cryptocurrency. It works the same way that bank accounts used to work where customers would gain interest for depositing in banks. But staking allows for much better rewards and increased liquidity.

Ankr is one of the original pioneers of Liquid Staking, a mechanism where users are given a derivative token of their staked token. So, they get the rewards/interest but can also use the token for other purposes. For instance, a token called aETHb might be swapped for ETH for enhanced flexibility.

Companies like Ankr offer an easy way for enterprises and individuals to enter the complex world of DeFi and Web3. As it’s already a safe ecosystem for crypto staking, there is little reason for regulation here. Regulations in this area, unless carefully thought out, would stall innovation and growth.

Many will immediately see how crypto regulations regarding Liquid Staking are going to be impossible to enforce in many regards. It’s already too difficult to track regular coin transactions, especially micro-transactions on wallets like Metamask. Adding derivative tokens to the mix is even harder.

Regulators across the globe seem to be working in a uniform fashion to implement crypto regulation. In the USA, the CFTC is gearing up to take a more prominent role.

Meanwhile, in Europe, ECB President Christine Lagarde has gone to parliament to argue for increased crypto regulation. However, she did admit that regulation for staking is a long way away.

“Crypto-assets and decentralized finance have the potential to pose real risks to financial stability. For the moment, the links between the private-sector crypto assets and traditional finance remain still limited.”

Where We Stand With Crypto Regulation

The fact is that we don’t actually need regulation in the cryptocurrency industry. First, because regulators are not skilled enough to genuinely draft effective policies. This is a fact - the Web3 industry is notoriously fast-paced.

The developers are continually creating new technologies. In contrast, the legislative process is known for its slow pace and lack of innovation.

Regulators have done little else aside from hindering and attacking the industry since the beginning. And it’s useful to remember that this is an industry that is thriving with absolutely no third-party assistance. The reason it is thriving is because there is no legislation or regulation.

In other words, safety, security, and education are required, not interference. At the same time, the crypto industry is not safe, and this needs to be remedied through better standards and educational content

If regulators took the time to understand the industry and worked with developers, it is possible that regulatory standards could be enforced. As it stands, few people are going to be able to comply with what they have drafted. Regulators are setting themselves up for failure due to draconian policies. It can only lead to a further divide.