What Types of Regulation are Coming to the Blockchain Space?
For many people who’ve been in the industry for years, the mass adoption and proliferation of blockchain technology seem inevitable. However, this is far from the truth, and even after 14 years the technology is far from universally adopted. The main thing holding the space back? A lack of regulation. Let’s dive into why this is, how regulation could benefit the space, and how it could hinder its growth as well.
It feels like the general awareness of blockchain technology is at an all-time high, and can only continue to go up. Thanks to the frenzy that was NFT mania and Elon Musk’s outspoken support of Dogecoin, the number of people who are at least familiar with cryptocurrencies and blockchain and those who have actually used the technology is higher now than at any other point in history. Naturally, this would lead many to assume that the adoption of blockchain will continue at a similar rate and that we may only be a decade or so out from using blockchain in our daily lives. Before long, we’ll all be using DeFi instead of banks, denominating our payments in stablecoins, and using smart contracts as our default arbitration platform.
Unfortunately, this future is not as certain as it seems. Even though blockchain promises to bring greater transparency, censorship-resistance, and trustlessness to many different activities, its full-scale adoption relies on one main entity: the government.
Proper taxation seems to be the first regulatory challenge that governments have begun to approach. About a year or two ago, world governments turned a blind eye to cryptocurrencies and blockchain, either due to lack of awareness or because they did not realize their potential. In the United States, there were little to no guidelines or regulations related to taxation, and many people got away with not filing taxes on their cryptocurrencies at all. This led to thousands, if not tens of thousands of people, getting away with tax evasion on potentially massive gains. Obviously, the government could not let this continue once the cryptocurrencies became influential enough to become a trillion-dollar asset class. In November 2021, almost one year ago, President Biden signed the Infrastructure Investment Act, which requires exchanges to report lots of information relating to their users’ digital asset activities, including sales of digital currencies, transfers to either other exchanges or external wallets, and the holding time before sale of cryptocurrencies. These changes are set to take effect in 2023, making tax evasion in the crypto space much more difficult to accomplish.
The second type of regulation coming to the space comes with the different classifications of cryptocurrencies. The Securities and Exchange Commission under former MIT blockchain professor Gary Gensler has already started its review of top digital assets to determine whether or not they should be classified as securities. If they are securities, then they fall under the purview of the SEC, and can only be traded on regulated exchanges like the stock market. Several entities have already been accused of selling cryptocurrencies as unregistered securities, the biggest being Ripple Labs for their role in the distribution of XRP. The case has been ongoing for multiple years, and hopefully a conclusion will be reached soon.
President Biden knew what he was doing by appointing a blockchain professor as chairman of the SEC, and it likely means that more regulations are impending. Other sectors, such as stablecoins and DeFi, are likely to have regulations imposed on them in the coming months or years. The definition of a stablecoin and what it can and cannot be will likely be defined, and decentralized stablecoins backed by a basket of digital assets like MakerDAO’s DAI do not seem like they will fit that definition. Only time will tell what this will mean for the market and if it will have any impact at all, but there will likely be chaos in the days following stablecoin regulation.
Even established cryptocurrencies like Ethereum are not safe from the government’s hand. For example, DeFi application Tornado Cash, a coin mixing service, was recently sanctioned by the United States for facilitating money laundering activities. Even though this was only built on top of Ethereum and nobody could stop it from being built, the fact that it is still running today and can never be stopped could prove to be a catalyst for regulators to come after the smart contract platform. Even though they could not explicitly remove it from existence, there is some concern that they prohibit certain transactions from being published. Though this seems like an impossible feat, centralized staking solutions like Coinbase, a US-based exchange, would have to comply with the government if they want to remain a company, and thus may not produce blocks that the government deems illegal. This of course is pure speculation, and Coinbase has made statements denying these allegations, but it is still a possibility.
The continued growth and adoption of blockchain technology will naturally lead to more attention and action from regulators worldwide. Even though some of the possibilities for regulation seem dangerous, it will ultimately make the cryptocurrency space friendlier for corporations to enter and more usable for everyday people. We live in the Crypto Wild West, and as much as we’d like it to stay that way, it was inevitable that it would not last forever.
By Lincoln Murr