Bitcoin’s Big Battle Ahead For Crypto Regulation Will See Lawmakers Push Back

Long Fight Ahead For Cryptos As Regulators Push Back

There has been a lot of buzz around the New York Attorney General’s report lately. He released a report accusing various crypto exchanges of doing too little to prevent market manipulation, one could conclude that regulators are gaining the upper hand in their ongoing battle with the crypto industry's more anarchic elements.

Along with the controversy at ShapeShift, long viewed as a model for those wanting to conduct exchanges outside of the state surveillance ingrained in KYC identification regimes, it does look as if officialdom is striking some heavy blows right now.

The fight has just begun. New technologies, the dynamic development of token-based business models and an evolving regulatory landscape will continue to create avenues for blockchain and cryptocurrency developers to protect privacy and challenge government intervention. Some of the battles come down to defining and managing jurisdictional boundaries — and that doesn't necessarily go in favor of the regulators.

This is why exchanges like ShapeShift and Kraken felt comfortable opting out of the New York market when they decided that NYDFS's BitLicense was too onerous. They could simply choose not to deal with residents of the state — much to the chagrin of the New York Attorney General's office, which called the exchange's refusal to cooperate with its request for information “alarming.”

At the same time, advances in cryptographic privacy are coming fast, with blockchain developers making strides with tools such as zero-knowledge proofs. Cryptocurrencies such as zcash, monero, and dash all enjoy these qualities.

Within Bitcoin Core, work is being done to make it near impossible to trace transactions — a goal that's critical, not so that criminals can exploit cryptocurrencies, but so that enterprises that might want to use these technologies don't expose corporate secrets to their competitors.

“Layer 2” solutions such as the Lightning Network, which allow for transactions to occur “off chain” will also enhance the privacy of cryptocurrency users. Meanwhile, related solutions such as discreet log contracts, which essentially blind information oracles from information about the contracting parties they serve, will create extremely private smart contracts and could encourage crypto “dark pools” whose transactions are invisible.

Nevertheless, it's ignorant to imply that the government doesn't have powerful weapons. If actions that take place on these systems are considered illegal, then participants must engage them in full knowledge that they are breaking the law. And if they're caught doing so, prison is always a possibility. That threat can be a strong, moderating force on behavior.

The powers of the state are far-reaching. With the implied intimidation of jail time or fines, it can force businesses to spend heavily on legal fees and compliance costs without even taken any action.