The Impact of Cryptocurrency Regulation on Innovation
Amid denial of ETF applications and mounting attitude toward cryptocurrency regulation, one of the main questions that arises is whether the regulation will stifle cryptocurrency innovation.
Unfortunately, the answer is that “it depends” and on several factors, such as who one talks to. Some will say that the hacking attacks, ICO scams, and the lack of delivery on projects all deter investors. Jon, the co-founder of ShapeShift, commented on the regulations, stating:
“What are the rules because nobody knows . . . I think a system where there are a lot less interpretation and a lot more clarity of where the various lines are and what falls in what bucket would be extraordinarily helpful for the entire environment.”
The absence of clarity on regulations is causing a lot of investors to invest their funds in offshore projects. Further, blockchain companies are turning away from US investors for safer areas such as Switzerland and Malta. According to Ran Neu-Ner, a seasoned crypto trader, he believes that the SEC must establish ICO regulations quickly, otherwise the US will eb at risk of falling behind the rest of the world and it may stifle the industry as a whole. This type of environment makes it very difficult for businesses to operate in.
On the other hand, there is good news on a daily basis and certain countries, with their proactive stance, may promote innovation. For example, Malta recently announced that ICOS will not be regulated, and neither will exchanges nor wallets. This type of stance will be addressed in new legislation set to e enacted this year. Steve Tendon, a member of Malta’s Blockchain Task Force stated:
“They might not be correct, they might have flaws, but at least they bring clarity. And if they are not the best ones, there is always an opportunity to improve.”
Malta’s stance may be based upon its understanding of blockchains underlying technology and the impact that the technology could have on society. Blockchain not only helps raise money, but it can potentially help institutions and industries evolve. Malta has also released ICO guidelines and whitepaper requirements – some of which are certainly tough, but for good reason. Tough guidelines may prevent scams and protect investors.
Malta’s position is opposed to that of the United States and Japan, which are both causing confusion and uncertainty with their failure to regulate the industry property. Again though, the big question here is whether imposition of regulation will hamper the industry’s innovation.
Still, the answer is that it depends. If regulation is carried out in the wrong manner, it could have negative consequences. Jon commented on the matter, stating:
“The hardest thing I think, to explain about crypto and Bitcoin and all these various tokens is that some of them might fit into old categories. But a lot of them really break the old categories. To try and stuff that square peg into the round hole to try to put them into the old categories [is] very limiting and stifling.”
“I think we need an understanding that these things are category-breaking. They may take more understanding and development before we even know what the rules should be . . . but in the meantime, for whatever rules they do want to apply, just make sure they’re clear.”
There are those who believe in cryptocurrency regulation as well. Darren Marble, the CEO of CrowdFundX, believes that regulation is necessary for innovation. He stated,
“People forget that at the end of the day, investors have to win.” And, regulation is not in place to stifle innovation, but to protect investors and to reduce scams and bad actors. Without regulation, investors may stop investing and the industry may cease to exist. Essentially, “All that innovation disappears and blockchain becomes a footnote in history.”
Learn from Switzerland or Malta?
The next question that arises is what the best course of action is. Some point to Switzerland’s approach, which takes a stance on a case-by-case basis and applies principle-based laws. This type of system prevents restricting things into boxes and it enables development.
FINMA, the Swiss Financial Market Supervisory Authority, released clear ICO guidelines and it remains as the largest hub for ICOs.
Alternatively, Malta has taken a different stance. Malta’s government believes that it is necessary to enact new laws and regulations. Tendon stated:
“What happens when something goes bad? Who is responsible? These are huge questions in my opinion and what is happening in the next regulation? These questions need new laws to be addressed. They aren’t existing laws that do.”
Jon’s position counters this approach. When asked how to handle regulation, Jon stated:
I myself would favor a world where there would essentially be the same attitude that many regulators in the US took toward the internet in the early days, which as a wait and see approach. They didn’t know where this technology was going and if they tried to put too many rules too fast, that would stifle innovation and create all sorts of problems. The way they treated the internet was great and it really allowed the internet, especially in the US, to really flourish and for all sorts of new things that nobody had thought of to develop and nobody could have predicted 20 years ago. In crypto, I think because it’s financially related or there’s value attached, it brings all the stigma with it and people want to put it in a certain box . . . I really feel like the best thing to do would be to let it develop because we just don’t know where these things are going.
At this point, it is very difficult to tell whether regulation or deregulation is the better option. There is no conclusive data that yet provides support for a position either way. The only thing that people who follow the industry can do now is to adopt a “wait and see” approach to the matter. The good news is that most countries are following either regulation or deregulation, so it will be interesting to see which one wins out in the end.