Wild West and Bull Run: The Path to Regulation
Are you still waiting for the alt season but haven’t heard of the “wild west” and “bull run”? Then you need to find out how the history of the crypto industry began and what the path of its formation was like.
We talked to one of the experts and asked in detail about the emergence of bitcoin and blockchain. Now we want you to understand how the accounting and contracts system were regulated at the beginning of the chain development and to realize how long the Wild West stage lasted and also what it all led to.
Bitcoin as a Response to High Commissions and Long Transfers
Do you know that the average transfer fee in the blockchain system is ~$0.5? Even if you send 100 bitcoins in the amount of $2,800,000, this figure will grow to ~$3. I think it’s fantastic!
Now imagine how much money and time it will take for banking operations to transfer the same amount to someone else’s account. And we do not take into account the fact that any such transaction will necessarily be checked for fraudulent activity by the security service and in case of suspicion it can be blocked.
But you may just want to give all your money to the bank as a commission to enjoy this wonderful process. Therefore, do not forget that with the help of bitcoin and other cryptocurrencies you can send money to anyone anywhere in the world instantly and without any intermediaries and obstacles.
Life without intermediaries is cool! This is the motto chosen by Satoshi Nakamoto, the creator of bitcoin when he proposed a new electronic payment system. Without the participation of the central government or financial institutions you can quickly and with a minimum commission make money transfers and most importantly − without the need to disclose personal information. Then 14 years ago it seemed fantastic.
As noted in the bitcoin genesis block, it was created in response to the 2008 financial crisis.
Blockchain, the technology behind the bitcoin, is featured in the same white list. It works like a chain of blocks in which data is stored. Each block contains information about the previous block and has a unique identifier itself, the so-called hash. Each new block is added to the end of the chain forming a continuous and non-editable data ledger.
The genesis block also contains an Easter egg in the form of the phrase: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks” which refers us to the headline of an article from the British newspaper The Times about the crisis in the financial system and shows the philosophy behind the blockchain offering an alternative to centralized financial systems.
The bitcoin genesis is a historical moment in the cryptocurrencies development. And what if this technology will be used everywhere? Then the whole banking system will collapse and you won’t have to feed the clerks anymore just because you have to send money.
You can only imagine what colossal sums flow out of the sight of the regulatory authorities. And, naturally, they seek to take measures to control such operations in order to profit from this process. But so far this money flow cannot be traced and, moreover, somehow limited.
How the accounting system and contracts were regulated at the first stages of the chain development
At the beginning of bitcoin the transactions were unmanageable like a shootout in the Wild West. The blockchain was like a dusty old journal in which people wrote down their transactions hoping they wouldn’t get lost in the chaos.
People paid with bitcoin uncontrollably e.g. they could buy pizza or drugs for fun on the infamous site known on the Darknet as Silk Road. There were no rules or control and no one really knew what he or she was doing. It was part of all the fun it was a new frontier and people were willing to take a risk.
Over time the increased number of users and transaction volumes has led to the need for stricter rules. An organization called the Bitcoin Foundation was created to set the standards for the blockchain. Other organizations were also created that became involved in the regulation of block chains, such as the Ethereum Foundation and Hyperledger.
And How Transactions are Verified and Coordinated With Network Participants?
Each transaction on the blockchain chain is verified by network participants to make sure it is correct. For this, the Proof-of-Work or Proof-of-Stake consensus technology is used. These algorithms make it possible to confirm transactions and guarantee the security of the network as a whole.
Each wallet has a unique address that is used to identify the sender and recipient. When a user wants to send bitcoins he creates a transaction that contains information about the amount of bitcoins, the address of the recipient and the commission.
Once a transaction is created, it is sent to the bitcoin network where it becomes available to miners, network members who process transactions and add them to blocks. They use their computing power to solve math problems and if they solve a problem they are rewarded with new bitcoins.
When a miner adds a transaction to a block it becomes unchangeable and is recorded to the blockchain, the chain of blocks that stores the entire history of transactions on the bitcoin network. An operation can only be confirmed once it has been added to a block and recorded on the blockchain.
After the transaction is confirmed the bitcoins are sent to the recipient’s address. Usually the whole process takes from a couple of minutes to several hours depending on the network load level and the size of the commission paid by the sender.
On the diagram it looks like this:
How this system was developed and further regulated
The bitcoin development and the regulation of its use took place through the same protocol which is controlled by the network participants themselves. This means that any changes must be approved by a majority making it more democratic than traditional forms of money management. That is, you yourself can determine the level of commission that you want to pay for the transaction. What bank can give you such freedom?
The development of technology took place in three stages.
The first stage is the era of cryptocurrencies. It started with the creation of bitcoin in 2009 and continues to this day. Over this period the first cryptocurrencies and blockchain platforms have been created and the basic principles of the technology have been developed.
The second stage is blockchain 2.0. Layer 2 technology has become to be used not only to create cryptocurrencies but also to implement various projects in other areas, for example, to develop decentralized applications (DApps) and smart contracts. This stage began in 2014 and continues to this day.
The third stage is blockchain 3.0. Blockchain Coins 3.0 has become even more widely used in various areas including banking, logistics and healthcare. During this period the concept of blockchain has also emerged which allows different networks to interact with each other. If earlier it was impossible, for example, to send bitcoin to the Etherium network then since 2017 it has become possible due to reintegration.
The concept of the new blockchain involves the use of this technology to build various decentralized applications and services. This makes it possible to transfer digital assets, data and information without intermediaries. This approach is designed to solve the problems of data centralization and control in order to increase transparency and security as well as create new opportunities for innovation and economic development.
Coming Back to Regulation
A high level of volatility and risk can serve as a catalyst for regulating the cryptocurrency market. Cryptocurrencies fluctuate greatly in price which makes investing in them very risky. In addition cryptocurrencies can also be used for illegal transactions, which is also a concern for governments and regulators.
Everybody Heard That China Banned Bitcoin Mining. Is It related to Regulation?
First, the Chinese authorities are concerned about the high level of power consumption required to mine bitcoin and are worried about the impact of mining on the environment. Therefore, they decided to ban mining in some regions of the country.
Secondly, mining is a relatively unregulated activity and the Chinese government believes that this will lead to financial risks for its citizens.
Will the US and the European Union Continue to Take Measures to Regulate Cryptocurrencies?
In the US, the Securities and Exchange Commission (SEC) has begun regulating Initial Coin Offerings (ICOs) and has classified certain cryptocurrencies as securities which means they must comply with certain SEC rules and requirements.
If at some point you want to purchase XRP, XLM, ZEC or ZEN coins then think carefully. After all if the SEC takes up something it brings it to the end.
The European Union has introduced the fifth Anti-Money Laundering (AML) Directive which requires all cryptocurrency payment services to be registered and comply with AML/KYC (“know your customer”) standards.
The First Country to Advocate the Regulation of the Cryptocurrency Sphere
Japan was the first state to propose regulation of cryptocurrencies. The Payment Services Act includes the regulation of cryptocurrency exchanges and exchange platforms.
The main provisions of the law include:
- Licensing of cryptocurrency exchanges and exchange platforms.
- Mandatory storage of user funds in segregated bank accounts.
- Regulation of identity verification and anti-money laundering (AML) procedures for clients of cryptocurrency exchanges and exchange platforms.
- Limiting the use of anonymous cryptocurrency accounts.
- Regulation of work with cryptocurrency derivative products.
- Ban on the use of cryptocurrencies as a means of payment in certain situations.
The law has also established mandatory requirements for licensing cryptocurrency operators and also strengthened measures against money laundering and terrorist financing in this area.
This law was the first legislative act that regulates cryptocurrencies at the country level.
Does the Share of Risk Still Remain?
Let’s imagine a situation: you decided to buy a cryptocurrency but you don’t know how safe it is and what its price will be in a couple of days. At the moment there are no clear rules for regulating transactions with cryptocurrency and its rate is subject to sharp jumps, which is a significant risk. For example, if a company decides to keep its funds in bitcoin then at some point it may lose most of its savings due to the inability to accurately determine their value.
Chikako Suzuki, a spokesman for PricewaterhouseCoopers Aarata, an auditing and consulting firm, stresses that this is a serious issue that needs to be handled with care.
What’s Happening With Crypto Regulation Now?
Blockchain regulation can have both positive and negative impacts on its development. On the one hand, regulation contributes to the establishment of the rules of the game in the market and increases the credibility of the blockchain technology.
However, excessive regulation will definitely hinder the blockchain development. For example, too narrow a framework will make it difficult to create innovative projects and finance them through ICO (Initial Coin Offering) as well as to complicate the creation and use of smart contracts which are an integral part of blockchain technology. And this is not to mention the increase in transaction fees and the increase in transfer time.
Cryptocurrency regulation is like trying to tame a wild animal. On one side of the scale we have crypto anarchists who believe that the market should be free and unregulated. On the other, there are governments of different countries who are afraid that the blockchain can be used to finance terrorism and money laundering.
But let’s be honest: cryptocurrency is not only the future of the financial industry. This is a source of uncontrolled income that cannot be taxed because due to anonymity it is impossible to find out how much this or that market participant has actually earned. And no prohibitions and regulations will help to find it out.
In this view many states have a burning desire to subjugate this market to themselves while receiving good dividends. And there is no question of any security here. But we all know that the more pressure is put on the crypt the more likely it is to go into the shadows.
Lado Okhotnikov, CEO of Meta-force.space, former CEO of Forsage.io
I agree that the cryptocurrency regulation can lead to a violation of its main principle — decentralization. Decentralization means that the cryptocurrency is not controlled by any central authority or financial organization but is managed using blockchain technology and network participants.
However, I do not support the view that all non-government controlled crypto exchanges are running fraudulent schemes. Of course there are unscrupulous market participants who can use cryptocurrency for deception but this does not mean that everyone is like that. This is a fact, it was before the advent of the blockchain and it will continue. The question is: who will teach people financial security?
Moreover, the opinion that you need to subjugate the cryptocurrency sphere in order to secure investments is fundamentally wrong. Cryptocurrency was created in order to provide people with freedom and independence from centralized structures. It should be available to everyone and not only to those who can afford to pay for the services of large companies, the same intermediaries hiding under the guise of banking structures
My opinion is that the cryptocurrency market regulation should not prevent innovation in this area and that a balance must be found between protecting investors and developing the industry. Only in this case it will be possible to talk about the deep implementation of cryptocurrency into financial institutions of countries around the world.
Source: Lado Okhotnikov’s LinkedIn page https://www.linkedin.com/pulse/regulation-should-prevent-innovation-lado-okhotnikov
Andreas Antonopoulos. A blockchain evangelist, an author of books on cryptocurrencies and a public figure in the field of cryptocurrencies. One of the first who opposed the centralized regulation of the cryptocurrency market.
Antonopoulos was invited to a meeting of the Canadian Senate Committee on Banking, Trade and Commerce to share his knowledge and opinion on cryptocurrencies.
Many issues related to the regulatory aspects of digital currencies were touched upon at the meeting. In total, the discussion lasted almost 2 hours and it received wide support from the cryptocurrency community for Andreas’ words:
“[…] entities near the center of a traditional financial network are vested with enormous power, act with full authority, and therefore must be carefully investigated, regulated and subject to oversight […] to ensure that the central actors do not abuse their authority and power for their own profit.”
On the contrary, in decentralized systems such as Bitcoin:
“There is no center to the network, no central authority, no concentration of power and no actor in whom complete trust must be vested. […] Bitcoin does not force users to surrender their identity with every transaction and put their trust in a chain of supposedly vetted intermediaries who must be trusted to control access to, securely store, and protect transaction data […] Because in Bitcoin trust is not vested in central actors, there is no need for centralized regulation and oversight.”
One of the main takeaways from these statements is that the need for regulation decreases with innovation.
Mike Novogratz. A founder and CEO of Galaxy Digital, an investment company specializing in cryptocurrencies and blockchain. Before the financial crisis of 2008 he was a dollar billionaire according to Forbes.
Mike does not hide the idea that cryptocurrencies should be regulated. But it should be moderate so as not to harm the potential that blockchain can bring.
Novogratz’s main message is that the crypto industry needs to be regulated in order for this area to get an impetus for even greater development.
NEW YORK (Reuters) — More regulation of the cryptocurrency space is needed to help institutional investors become more comfortable with digital assets and have the burgeoning asset class really take off, Mike Novogratz, founder of crypto investment firm Galaxy Digital said on Wednesday.
“We need some regulation,” he said at a conference held by Piper Sandler. “That’s an unpopular opinion in crypto circles, but if you want to have institutions join the revolution, you need some regulation.”