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Light Touch Regulation for a Global Blockchain Revolution

By Bret Baker | November 14, 2017

As blockchain technology is used for more and more purposes beyond currencies like bitcoin, more and more governments around the world are looking to get in on the economic action blockchain technology is creating. As these overzealous bureaucrats and public officials try to centralize and control services that are popular because of their dispersed power, they only harm the adoption and innovation of a service that can improve security, transparency, and property rights compared to today’s status quo. Countries that have a light-touch regulatory structure can reap the economic and societal benefits of the emerging blockchain revolution.

Bitcoin and blockchain technology in general are thought to be out of the reach of government control because they cut out the middleman in everyday transactions. While this is true to a certain extent, governments have mastered the art of making life unnecessarily difficult for consumers. With the international connectedness possible with today’s technology, it is simply not possible to completely eliminate the use of these sorts of technologies, but costly and unnecessary government intervention has shown that it can still substantially decrease their use

Citizens often turn to the security of cryptocurrencies when their governments cannot be trusted. In places like Venezuela and China, this is dangerous for the government controllers who rely on their citizens’ lack of agency in everyday life. As a result, government actors go after the innovators whose only sin is that they cut they cut government out of the loop.

Governments can still exercise some power over these peer-to-peer systems because of their self-created monopoly on their currency. By having state-backed currencies, governments drive out currencies like bitcoin by leveraging the public trust and stability a government has in order to guarantee by fiat the long-term viability of their currency, something a private organization backing a currency can’t do. 

To illustrate the point, imagine the difference in difficulty between taking down a national governing body and taking down an online network – which currency-backing institution sounds more reliable to you when considering how you want to be paid after a long day of work?

Widespread trust in one currency was at one time difficult without government backing simply because of the quantity of valuable assets needed to back the money. The scale of trust or assets needed for national currencies in modern economies made governments a natural partner for money, but now that blockchain allows for trustless double entry bookkeeping at scale without a bookkeeper, governments are no longer the only ones capable of creating nationwide or even worldwide trust. 

Because of the dominance of government currencies, current regulatory practices do not always take into consideration the possibility of alternative currencies. Exchanging cryptocurrency for government-backed currency is still a necessity in most cases. This is how governments exercise their power over cryptocurrencies, as they then tax the gains of citizens’ exchanges or go so far as to shut down exchanges for private currencies altogether.

As bitcoin and blockchain are relatively new innovations, there is the temptation to regulate and tax this industry to death simply because it is different from existing technologies and financial institutions. Countries that have avoided that temptation and chosen a light touch approach, such as the United Kingdom and Japan, will benefit from the increased opportunities consumers have in the financial and other sectors. 

These countries have recognized and updated outdated regulations to treat cryptocurrency in a similar manner to foreign currencies – the United States currently treats things like bitcoin as property, meaning every transaction involving cryptocurrency has to be recorded by the consumer for tax purposes. This is not only time-consuming and inefficient, but the specter of the IRS can dissuade people from using cryptocurrencies despite their potential.

That is not to say light touch regulation means governments have no role, but that governments know their role – enforcing contracts and protecting property rights – and stick to it. By simply staying in their lane, governments can be cryptocurrency-friendly. In Singapore, government actors looking for illegalities monitor the “activity around cryptocurrency, rather than the cryptocurrency itself.” In Japan, financial regulators have approved numerous cryptocurrency exchanges and work closely with these exchanges to combat money-laundering and illicit financing. In the United Kingdom, regulators excluded cryptocurrencies from value-added taxes and have established clear directives for firms and consumers in that industry.

Going forward, there are still plenty of questions to answer on how governments and private currencies should coexist, but it is clear that heavy-handed regulation is not the answer to this developing technological revolution. From China and Russia to Venezuela, government efforts to throttle the adoption of blockchain technology via government licensing of mining, strict government oversight of cryptocurrency development, or flat-out bans of cryptocurrency entirely in order to maintain complete control are not only costly and ineffective to enforce, they harm their citizens looking to use payment systems that better fit their financial needs.

In order to foster secure economic growth, governments have to be willing to let their citizens innovate and incentivize continued innovation with focused, light-touch regulation that addresses the actual problems arising from the innovation, not kill the innovation itself. Preemptive, heavy-handed oversight is both intellectually lazy and inefficient, and the US would be wise to avoid these mistakes as we enter the beginning of the blockchain revolution.