Is Regulation Good or Bad for Crypto?

One of the most common concerns we encounter from other cryptocurrency users is that “regulation is bad for crypto; legislators either don’t understand the technology or are lobbied by big banks. The less regulation in this space, the better.“

This isn’t too surprising, given that cryptocurrencies were initially created to explicitly circumvent centralized entities like governments, and many early adopters in the space came from cypherpunk and libertarian backgrounds. To say there’s a vein of anti-government sentiment in the cryptocurrency community would be an understatement.

In this post, we want to take a closer look at whether regulation is good or bad for cryptocurrencies, if governments can even regulate them in the first place, and how you, as a user, can affect the future of crypto regulation.

Cons of Cryptocurrency Regulations

Let’s start by taking a look at the downsides that would come with more cryptocurrency regulations.

Increased Compliance

There’s no way around it – new regulations would inevitably create some additional amount of bureaucracy, paperwork, and red tape. However, most of this burden would be placed on platforms and providers that want to offer crypto-related services to their clients, or on high-profile investors that can influence and manipulate markets (similar to existing securities compliance). Little would likely change for end-users who already submit KYC/AML documentation.

The biggest concern with increased oversight is that the costs of compliance will be overly burdensome for small players and startups in the space. That said, we believe that increased oversight and compliance would be net-good for the average crypto consumer by creating a more robust and safer ecosystem. Striking a balance between these two halves will be important.

Restricted Products or Services

Over the past year, we have seen multiple instances of regulators like the SEC targeting and attempting to regulate crypto product offerings to U.S. customers. These restrictions are typically around financial products that would be traditionally restricted to accredited investors. Formally regulating crypto would mean that many existing risky products or services may be deemed too risky for non-accredited investors, and have access restricted to U.S. users.

Stifling Innovation

If the new compliance and licensing burdens are too expensive, or allowed products and services are too restrictive, then many crypto projects will choose to cease U.S. operations and move to a more friendly country. We’ve already seen countries like Singapore and Malta thrive as crypto development havens, however, this is generally due to their lax taxes and regulatory structure. Crypto advocates fear that strict regulations will drive away innovators in this nascent industry when the U.S. should instead be positioning itself as a global thought-leader in this space.

We’ll address this point more below, but for now, we’ll just say that there’s a fine line between too little and too much regulation, and we do recognize that improper regulation could indeed stifle innovation in this space, particularly by preventing new emergent startups from having a chance.

Pros of Cryptocurrency Regulations

Preventing Bad Actors

There are a lot of ways regulation would make the digital assets space safer for end users. Here’s how regulation could help prevent bad actors:

• Project and token licensing would reduce anon teams and rug pulls
• Prevent pump n dumps by requiring project marketing and influencer disclosures
• Restrict what centralized service providers can do with user funds (no yield farming with user deposits)
• Better identify and punish front-running and insider trading

Right now there really are very few laws around most of this for cryptocurrency. As such, many users are now realizing that service providers have very little accountability if something goes wrong. Many analogous laws exist for these things in the TradFi world, and for good reason.

Tax Clarity

One common objection we hear is that by formally regulating cryptocurrency, Uncle Sam will take a big chunk out of every transaction for taxes.

But… this is already the case. And as it currently stands, digital assets face fairly rigorous tax reporting standards, requiring that users calculate profit or loss on every transaction – even if you’re just using it to buy a $10 lunch. It would be difficult to come up with a tax law that is worse than what we have now, which is why any regulatory tax clarity should be welcomed by crypto users.

For example, the recent Responsible Financial Innovation Act had provisions that would:

• Not require tax reporting of profits/losses on purchases under $100
• Only require reporting income from staking/mining/airdrops when spent, as opposed to when claimed or earned
• Clearly spell out which digital assets are commodities and which are securities

Simple changes like this would make it easier for users to spend their cryptocurrency like, well… currency, without having to carefully log every transaction. If rules like the above get adopted users would actually pay significantly less in taxes than they do with the current minimal regulatory guidance.

Codifying User Protections

Similar to the above section, there’s a whole range of user protections in the TradFi world that need an equivalent for crypto. Examples include:

• Insurance on deposited user funds
• Customer service and minimum uptime standards
• User privacy and data security protections
• Clear disclosures of risks and fees associated with products and services

Green Lighting Innovation

One major concern about regulating crypto we mentioned above was the potential for increased regulation to hamper innovation, which is true if improperly implemented. However, proper regulation would have the opposite effect and would give businesses and builders the green light to operate responsibly in the U.S.

Because the existing U.S. laws on crypto are vague or nonexistent, it can make it difficult for business owners to plan ahead and seriously invest in U.S. operations. Better regulatory clarity gives businesses the information they need to make proper long-term plans and will help to bring innovators and new businesses to the U.S., provided the new laws are not too burdensome.

Widespread User Adoption

The same logic above applies to more than businesses – it also applies to every citizen in the United States. How many of you have friends or family who dismiss blockchain tech as one big scam because there’s no formal backing for any cryptocurrency? Once cryptocurrency is legitimized by the government, that paves the way for widespread adoption from everyday people who were formally on the fence about it.

Can the Government Regulate Crypto?

For all this talk about the pros and cons of regulating cryptocurrency, there remains an important question: can the government even regulate a decentralized technology?

Well, yes and no.

The U.S. government can’t stop you from using any blockchain or other decentralized tech, because there can always be some nodes maintaining a network outside of the government’s jurisdiction. Likewise, even dapps whose front-end UI restricts user access from entire countries can’t be stopped by a VPN or by interacting with the blockchain directly.

So, no, the U.S. government cannot directly regulate cryptocurrencies or other decentralized networks.

But the government can make it incredibly difficult to get fiat cash on or off of these networks and generally restrict their usefulness to anyone within a given jurisdiction. You can effectively ban digital currencies by making it impossible for users to buy, sell, or spend their crypto locally. This doesn’t physically stop users from interacting with the network but does strongly disincentivize users from using it in the first place.

And, like it or not, regulations are coming to cryptocurrency in America. In March 2022 President Biden announced an executive order telling U.S. regulatory bodies to investigate and research decentralized technologies, and we’ve seen multiple pieces of legislation attempting to partially regulate various aspects of the industry.

What Happens When Crypto is Regulated?

For starters let’s be clear – the United States government is not going to ban cryptocurrencies, or anything resembling a ban. Certain risky aspects of the tech may be restricted (advanced DeFi stuff like algo stablecoins come to mind), but nobody is trying to get rid of blockchain tech as a whole. Most of the legislators we’ve talked to understand the potential, they just want to figure out a safe way to implement the tech so their constituents don’t get burned.

The first step will be exploratory groups and committees from the states and various regulatory bodies, basically trying to understand the technology and how it might fit under their jurisdiction. We’re already well into this step with Biden’s Executive Order earlier this year and committees asking for input such as California’s Department of Financial Innovation and the CFTC’s request on climate matters.

Many of these regulatory bodies are actively looking for comments and input from stakeholders like you – check out our Advocacy Portal to learn more.

The next step will be legislation for things that already exist in the TradFi world, that are easy to implement in crypto. Stuff like licensing for service providers, disclosure requirements, and tax clarity are all likely to be among the first legislation implemented.

The most challenging aspect of cryptocurrency to legislate is the truly decentralized stuff; DeFi, DAOs, and anything that lives purely on the blockchain. This is unprecedented territory technologically and legally speaking, and new frameworks and rules will likely have to be created. The challenge here is keeping up with the pace of innovation in the industry, which is why we’re now seeing agencies like the SEC beef up their staff in an attempt to move quicker and handle the required workload.

This last part will be the most challenging and will require regular communication from us, the users, to make sure regulators understand the tech and what we want to see from regulation. 

There are bound to be growing pains, and it is unlikely that regulators will get everything right as they begin to write legislation, but that’s why it’s so important that users get involved now and start educating these policymakers on the benefits of crypto.

Make Your Voice Heard

We can debate whether more regulation is ultimately good or bad for the crypto ecosystem, but what isn’t up for debate is the fact that regulation is coming to this space. At this point your options are either:

1. Ignore it and hope legislators get it right
2. Get involved in grassroots crypto advocacy and make your voice heard to your state and federal reps

Legislators put a lot of value on their constituent’s comments. By banding together as a community and sending thousands of comments to our reps, we can make a difference and help ensure that our rights as consumers are not forgotten as crypto legislation is drafted.

Check out our all-in-one crypto advocacy portal, your HQ for everything related to crypto legislation in the United States. We make it easy to: