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Understand three challenges that make regulating cryptocurrencies difficult for nation states

Cryptocurrency regulation continues to be a headache for nations, and there seems to be no easy way around this difficulty. Many say innovation beats regulation. While this is true, there is a need to build a bridge between innovators and regulators to build investor confidence. This article examines three aspects complicating crypto regulation in Africa.

decentralization

Decentralization is at the core of the nature of cryptocurrencies. It is the principle behind the blockchain technology that offers crypto users security, freedom from censorship and privacy. The technology, on the other hand, also has some disadvantages, such as the impossibility of reversing wrong transactions and the permanent loss of funds in case of forgotten private keys. As the pros outweigh the cons, decentralization has been favored in cryptocurrencies, also to offer people an alternative to centralized financial services.

Decentralization came before cryptocurrencies in other ways. But predicting their impact on the money is new for regulators. Centralized authorities such as central banks are structured to oversee monetary policy and money flows in a country. In contrast, cryptocurrencies have no central authority, jurisdiction, or unified policy. How can a single government oversee all decentralized cryptocurrencies?

Given the costs involved in enforcing regulatory requirements, it is easier to estimate the potential costs of regulating cryptocurrencies. This is how different countries ban the use of cryptocurrencies. Bans also result from numerous scams that hurt investor confidence. Regulators seek to act in the greater interest of their citizens as both investor and capital protection are key objectives for them.

Today’s rules may not have existed decades ago; much collaboration produced workable frameworks for business and regulators. That same drive for collaboration will make it easier for regulators to navigate the complexities of crypto.

Protocol and Governance Diversity

Different cryptocurrencies have different rules, protocols, and governance systems. Bitcoin
Bitcoin
for example, has the Bitcoin Foundation, which is made up of investors and developers who make decisions about the protocol. Some cryptocurrencies have no apparent formal leadership as their founders choose to remain anonymous. Others have fully incorporated companies, boards and employees. Relying on principles such as “code is law,” some companies opt for flat structures and completely dispense with hierarchies.

Contrast this with centralized structures where there are clear responsibilities. It is easier to meet established regulatory requirements such as compliance and reporting. How do crypto companies comply with financial reporting? Who is responsible for financial losses in a bear market? Who is tracking suspicious or fraudulent activity? Where can they report this activity? Implementing decentralized governance in finance has therefore been complex given some of these issues.

The differences in protocols and governance mechanisms have underlying principles. Acknowledging these core principles is a good starting point to build a better understanding of crypto governance.

Diversity of responsibilities

Many crypto companies are moving to countries with friendly regulations. A ban in one country prompts a move to another so business can continue for companies looking to grow in the crypto industry. There is an ironic existence of the need to allow for regulation, yet cryptocurrencies should never be formally regulated. Cryptocurrencies were designed for peer-to-peer use and are ideally valued and used by individuals.

Perhaps if people understood the uses and risks of cryptocurrencies individually, it would reduce the need for regulation. However, many people have yet to understand how crypto works. Others see no need to use it at all. The value of cryptocurrencies is very subjective at this point. These aspects are in the foreground for the regulatory authorities. Why should they devote resources to something that barely a third of their citizens use on a daily basis?

The precedent set by El Salvador in 2021 and the Central African Republic in 2022 to accept Bitcoin as legal tender has yet to prove significant value for other countries to do the same. It is also too early to assess the impact of introducing Bitcoin as legal tender if it is a peer-to-peer payment system. What is important to note is that people, businesses, and regulators have ongoing discussions about the potential value and impact of crypto in their countries. It is perfectly fine that every country does not have all the answers at this point on how to regulate this dynamic industry. It would be worrying to sweep problems under the proverbial rug.

future outlook

One way to bridge the gap between crypto governance and regulation is to create forums for regulators to engage with crypto industry players. It will draw on the strength of the relationship between regulators and industry players. Consequently, short courses, sandboxes, and small victories form three points of progression for this complex area. A better understanding of the potential of these tools and this dynamic ecosystem is the bottom line. That it is currently difficult does not always mean that it will be impossible to regulate. Patience with the process will yield good results for years to come.

Disclosure: I hold bitcoin and other cryptocurrencies.

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