Why Banning Bitcoin and other Cryptocurrencies is Not the Solution
Many government bodies, regulators, investors and banks see Bitcoin, or even the whole cryptocurrency market, as a speculative bubble. Some say it is a fraud, while others speculate that it will continue to rise in 2018. Earlier, I wrote an article why I believe that Bitcoin will fail. Not because it is a fraud, but because it is flawed. Despite my belief that Bitcoin will eventually fail, blockchain and some, not all, cryptocurrencies will likely reach mass adoption and bring significant change to how we run organisations and societies. Since the innovation of blockchain and cryptocurrencies is too important, I do not believe that considering banning cryptocurrencies is a solution as is now being considered by multiple countries.
Cryptocurrencies are a completely new way of doing business, raising money, transferring money, making transactions etc. Bitcoin is only nine years old, and as such, we are still learning how the underlying technology, blockchain, works; how we should deal with it; how we can implement it within our products and services, etc., resulting in a plethora of new cryptocurrencies.
Cryptocurrencies and opportunism
Of course, with such a new technology, there is a lot of opportunism, which is what you see happening now. This is nothing new. When gold was discovered at a new location in the mid 19th century, there was also a rush and opportunism to make a quick buck. I think in the coming years, the market will stabilise, partially because there will be regulation that will ensure a more stabilised market around cryptocurrencies, partially because we will better understand how distributed ledger technology works and partly because people will start to see the actual value that cryptocurrencies have instead of speculating with them.
As such, in the coming years, flawed products and ICO-scams will likely disappear, just as we saw happening with the internet bubble in the 1990s. Just like then, it will take some time before we get rid of the bad apples and we may never get rid of them completely. This is nothing new either. As long as the internet exists, we have hackers and criminals trying to steal money and data from innocent citizens. However, having some countries outright banning cryptocurrencies and ICOs, preventing citizens from using crypto exchanges or requiring citizens to convert virtual accounts into real-name ones will not stop this. Those states that are considering banning Bitcoin and other cryptocurrencies might do so out of fear of losing control over their citizens. After all, the decentralised nature of cryptocurrencies allows for performing transactions outside the government’s view. However, I believe that banning is not the solution. Well thought out global regulation and education, though, is.
Global regulation and education
As is with any new technical innovation, especially in the information technology space, regulators always lag behind events. The time it takes to implement regulations and implement laws is too long to make them relevant to the digital space. As soon as new regulations are announced, the community moves ahead and develops new solutions. In addition, as much as governments cannot prevent hacks, spam or phishing, they will not be able to prevent hacks and robberies in the cryptocurrency market. In addition, cryptocurrencies are inherently decentralised, virtual and borderless and trying to regulate such a phenomenon in one part of the network will not work. As Joachim Wuermeling of the Bundesbank recently stated, the only way to regulate a decentralised phenomenon is through global agreements:
“Effective regulation of virtual currencies would therefore only be achievable through the greatest possible international cooperation because the regulatory power of nation-states is obviously limited.”
The problem with global regulations is that they take time and a lot of countries have different motivations to ban or regulate cryptocurrencies. Nevertheless, there are two areas regulators can focus on in attempting global regulations: crypto exchanges and ICOs.
Regulations can force crypto exchanges to comply with KYC-AML regulations to prevent cryptocurrency being traded by people who are not allowed to do so (although due to the inherent decentralised nature of it, they can never prevent users from making transactions outside exchanges). Regulations can enforce exchanges to take the right security measures, but completely preventing hacks or digital robberies is, unfortunately, impossible.
In addition, regulators should focus on the ICO, as a more streamlined process around ICOs definitely can prevent scams and Ponzi schemes. Similar to the IPO regulations we have, ICOs should also comply with certain regulations to protect investors and keep founders accountable. However, regulations should not prevent ICOs completely, as it is truly an innovation with tremendous potential. Therefore, similar to the GDPR compliance developed by the EU, a global standard should be developed for ICOs. These regulations could include requirements such as:
- Disclose financial, accounting, tax, and other business information before an ICO;
- Implement escrow functionality with smart contracts to ensure funds only get released upon reaching certain milestones. If those milestones are not met, funds will be returned automatically;
- Have a board of advisors that are involved with the company, instead of having stock photos as advisors;
- Have a prospectus that informs potential investors of the risks involved with the ICO.
Apart from regulations, another area that governments and regulators should focus on is educating citizens about the risks involved when dealing with cryptocurrencies and help consumers understand how they should deal with cryptocurrencies. Russia has already announced a program to educate its citizens on cryptocurrencies and the dangers associated with investing in them. More countries should follow to help citizens understand what this new phenomenon is and what risks are involved with it.
Banning Bitcoin or cryptocurrencies is not a solution, nor is prohibiting ICOs. The genie is out of the bottle, and I believe that the benefits that these innovations have for the global economy will be enormous, although at this point that might not yet be clear for certain governments. Instead, regulators should focus on enabling innovation in the blockchain space and offering clarity regarding ICOs by developing clear, and if possible, aligned regulations similar to regulations for IPOs. In addition, governments should focus on educating the people, as the vast majority of consumers have no idea what cryptocurrencies are, how they work and what risks are involved.
A more educated and regulated market, without limiting innovation, will only make this space better, something that will benefit all.