Thinking about crypto from a regulatory/legal framework

“We can drive around this town.  And let the cops chase us around.”

– Hey Jealousy, The Gin Blossoms

One of the hottest areas and biggest questions around crypto is its regulatory and legal framework.  In fact, President Biden issued an executive order last week instructing agencies to come up with regulations.  So, government is coming.  Exactly how so, is not entirely unknown, but here’s how to think about it.

First, technology is generally amoral. How technology is used determines its morality, and most technologies have negative use cases, which do argue for banning the technology.

For example, for a hundred years, people have used cars for all sorts of illegal purposes (kidnapping, murder, smuggling, etc.) or telephones (conspiracy, coordination of illegal activities).  Yet, we do not propose eliminating automobiles or telephones given their overwhelming positive use cases.

However, some areas are particularly problematic, such as explosives production, drug manufacturing and distribution, and in particular, moving and holding money and assets.  Moving money and assets allows for financing of all sorts of illicit activities (terrorism, drugs) or simply evading other controls for tax/revenue or anti-money laundering purposes.  This is why banking is historically so regulated, and there is a strong market for locations that opt out of or modify elements of this (such as offshore locations).

Into this, come crypto.  Crypto has no domicile.  Crypto allows anyone to freely join or leave.  Crypto is not controlled by any government.  Anyone can quickly move things of value between entities (stablecoins, cryptocurrencies, NFTs).  I’m also ignoring the question of whether stablecoins are a security (pass the Howie test) — that’s for another blog post.

So, from a simple perspective, crypto should fall under the same regulations as any other money moving system.  Every player should be government regulated and forced to comply with effectively banking or money transmitter regulations.

However, this is practically almost impossible.  By its decentralized nature, it is very hard to enforce and strong regulations would move many people underground.  In addition, given the growth, many countries will simply allow it, leaving companies that ban crypto at potentially a huge competitive disadvantage.

Some countries, like China, have made their choice.  They banned all crypto.  They view it as too dangerous and accept the loss.  Other countries, like Malta, have welcomed crypto, trying to gain the benefits of being open to a regulatory framework.

Into this, comes the USA.  There is strong pressure from various departments, and on various grounds:

  • Tax: Crack down on people not reporting income or gains within crypto
  • Security: Ensure Terrorism and AML and other uses do not happen through crypto
  • Security: Ensure investors are not sold securities without disclosures.

Let’s see what the agencies come back with and hope it allows for continued use and innovation within crypto.