Since the very beginning of its inception with Bitcoin in 2009, cryptocurrency has remained at the center of debate. On one hand, you have a global community of blockchain enthusiasts who recognize the concept of a decentralized currency as revolutionary- willing to invest millions into a market which they believe is “of the future”. At one point, cryptocurrency became so popular that people began referring to those passionate about the technology as “crypto evangelists”- such was their level of belief and commitment to the idea.
However, as the positive hype around cryptocurrency increases, so does the negative. Just recently, Twitter was ablaze with talks of a new infrastructure bill that at the time was in the process of being passed. Though this wasn’t the first time a government had attempted to regulate the crypto space, the harsh punishments dictated in the bill made the piece a major point of discussion. If implemented, it would mean any individual failing to follow strict reporting requirements could face up to 5 years in jail while also being labeled as a felon.
All this controversy has created a wave of conversation about the reasonability of these regulations. What are the reasons behind such strict actions? Is the use of cryptocurrency really so threatening? And, at the end of the day, is outright banning a viable solution?
Before we get into that discussion, let us first attempt to briefly explain the technology behind cryptocurrency and what makes it so revolutionary.
Blockchain Technology in a Nutshell
Cryptocurrencies are based on blockchain technology. This can be loosely explained as a decentralized, digital ledger which stores information in the form of blocks. This ledger is accessible by anyone in the world, with no single individual or group possessing control over its functions. The blocks that make up the blockchain are connected to one another with the use of cryptographic hashing algorithms. These help to ensure that the information within them remains immutable and hence safe from tampering.
A newly created block must reference the hash of the block right before it in order to be accepted onto the chain. This hash can only be calculated by solving an incredibly complex math problem- which requires an extreme amount of computational power. Those who participate in this process are known as miners. As a reward for spending their resources on populating the blockchain, successful miners are granted coins which have monetary value, such as Bitcoin. Users in possession of these coins can then use them to make transactions, buy assets, or trade them to obtain fiat money of the same value.
This marks the beginning of a concept now generalized as cryptocurrency- the popularity of which has exploded in just a few years.
Cryptocurrency offers its users a host of advantages. Unlike transactions in the real-world which require the involvement of intermediaries like banks, transactions on the blockchain are done directly between two parties. As the blockchain is transparent, it makes it easy to track the history of a particular asset to verify its ownership. Money transfer is also a much more efficient process with the use of cryptocurrency, as all it requires is the address of a receiver’s wallet for money to be transferred any time of the day. Users also may not reveal their identity on the blockchain, choosing to instead conduct all their business anonymously.
However, many argue that the very benefits of decentralization and transaction anonymity offered by crypto assets result in them being favored for use in a host of illegal activities. Individuals involved in crimes like money laundering, drug dealing, weapons trading, and smuggling are often seen employing the use of cryptocurrency to avoid being tracked.
In an attempt to prevent this, regulatory agencies like the SEC, FATF, FBI, and DHS have begun cracking down on businesses and individuals involved in the crypto space. Fourteen major nations of the world have also announced bans on these digital assets, with the list including China, India, and Turkey.
It seems as if users of the blockchain space remain perpetually burdened with the need to tread carefully- or face risk of strict action being taken against them.
Criticism Put Forward By Blockchain Community
The concept of an anonymous, decentralized form of currency not tied to any government or bank is completely unprecedented. Attempting to use age-old methods to regulate this new, rapidly changing landscape is what many members of the blockchain community have a problem with.
For instance, under the Infrastructure Bill, it is mandatory for those residing in the US to file a report including the personal information of the person from whom they have received digital assets. But how can such a command be enforced in, say, DeFi transactions?
Generally speaking, the tokens received from a liquidity pool withdrawal cannot be traced to one or more particular accounts, much less to a particular person. And what if the tokens were sent to a decentralized exchange, for example in the case of a token swap? In such a scenario, the receiver of the money is not even a person, but a collection of smart contracts.
Lecturer and researcher specializing in the regulation of cryptocurrency Abraham Sutherland has been seen actively speaking up on this issue. In a recent interview, he shed light on this, stating, “There is indeed something ridiculous about this effort to apply section 6050I to digital assets, and in particular to DeFi transactions.”
Change is always a scary concept. If we take a look back in history, technological advancements as crucial as the telephone and radio system were met with just as much scrutiny and mistrust as we are seeing unfolding against cryptocurrency today. At the end of it all, the world learned that suppressing something that provides value in fear of it being misused is preventing us from advancing.
The negative use of cryptocurrency cannot be justified, but at the same time, outright banning and unreasonable regulations do not seem to be much of a solution either. The key to ending this war is to develop an understanding of both sides of the debate. Only then can a solution be obtained that benefits everyone.