Can a Decentralized Market Ever Be Regulated?

With cryptocurrency growing immensely in popularity, applications and market cap, the idea of regulating and having accountability for the decentralized system it's built upon seems to be growing as well. In this article we discuss some of the issues with trying to regulate a decentralized market.

What exactly is cryptocurrency built upon

Cryptocurrency, with everything from Bitcoin, to Ethereum and all in between, are run on decentralized financial networks, or DeFi. Within these networks, investors are allowed to engage in things such as borrowing, lending and investing while utilizing blockchain technology, without the use of financial intermediaries, like banks. Blockchains store a secure digital log of transactions and these individual “blocks” are all linked together in a list all of which combine to create a blockchain. When blockchains are combined with the DeFi, this creates “smart contracts” which are enforceable, automated agreements between individuals, all without the influence of banks or any other unwanted intermediary. With the DeFi market growing worth upwards of nearly $128 Billion, this shows not only a hugely growing market but hesitance for some to call for general regulation with cryptocurrency. The enormous potential and utilization of DeFi is undoubtable, with it easing international trade, making payment much more efficient and safe. A main difference is unlike a bank or financial institution, there is no customer service hotline to call if things go awry. Investors go into investing in cryptocurrency knowing full well the risks as well as the unique field they're operating within, but when it comes to millions of dollars being exchanged, there is always the risk of something nefarious happening. Everything from security failures, to hacks to even total collapses of a network, thus a relatively new form of investing is not without issue and unlike banks, there is no stop gap. Banks can be sanctioned or even shut down to protect its customers, with cryptocurrency it almost feels like the wild west. Anything goes, anyone has the opportunity to strike gold but also has the chance at being taken down. There is an inherent risk in investing of any kind but this extra layer of the unknown may be too much for some investors to handle.

Can there be cryptocurrency regulation?

This is a difficult question to answer straight away. There are a multitude of factors to consider, many of which span continents, different financial regulations, among many other things. DeFi systems are built on decentralized systems that distribute functions away from a central location or general authority. Where we know JP Morgan Chase is located at 383 Madison Avenue in New York, the same cannot be said for Bitcoin. Every node involved, that is a computer, IP or server is located anywhere in the world and the system makes its own decision. Unlike traditional transactions, cryptocurrency operates on a global scale, where traditional regulatory standards exist. The uphill challenge of global coordination is apparent. While some countries have stronger financial frameworks equipped with regulations, there are countries that are at different, varying stages of financial development. This alone can be seen as an exploit for some platforms to gravitate towards, seeing lesser financial regulation as an opportunity. The answer to all of this isn't obvious but the question surely is: can this all even be regulated? There has often been discussion of if the cryptocurrency rules set forth by the Financial Actions Task Force, or FATF, is strong enough. When it comes to the FATF, they really only cover licensed businesses that allow individuals to trade crypto, the financial exchanges themselves. But DeFi platforms remain largely untouched. The idea of regulating centralized platforms leaving others, like DeFi, to operate unperturbed not only does not make very much sense but will limit the overall effectiveness of crypto industry regulation in general. One possible solution in mind would be to have specific source code built into decentralized applications, which would require the developers of the blockchain software to comply. The idea that

How can regulation ever be achieved

In short, yes, but it would be increasingly difficult. Regulators would need a few things: access to IP addresses, local internet providers cooperation to identify the physical location of people using the system. Should they look to shut down illegal activities as well as local law enforcement? Think of this on a global scale. From a cryptocurrency usage scale, this alone could deter people from jumping into cryptocurrency investing. The sole goal is to dissuade illegal activity, but it could also send massive ripple waves through the entire cryptocurrency market. While stopping illegal activities may be the goal of this regulation, it could drive people away from cryptocurrency investing, period, bringing into question the need for regulation in general. It is a hard pill to swallow and one that local and international legislators are continuing to try and develop. Recently, the EU and U.S. have proposed legislation that could ban the use of the DeFi. The Markets in Crypto-Assets Regulation (MiCA) as well as the U.S. Stable Bill were proposed in 2020. The impossible task of regulation seems to be a little bit more of a reality.

In conclusion

We have covered what it would take and the undertaking accompanied with attempting to regulate a decentralized cryptocurrency market. It does seem like we are inching closer to some general regulation surrounding cryptocurrency. The trillions of dollars passing through the cryptocurrency market has made it a target for local and international governments to take notice of, and while their real target is to deter illegal activities occurring within the cryptocurrency market, there is no denying that rocking the crypto boat may have more negatives than positives. Weighing the efficacy of such a regulation brings in more questions than answers. Cryptocurrency was a way to be in control of our money, be in charge of how our money operates. No governmental oversight and ultimate financial freedom. The reality is we are inching closer to just the opposite of that. Oversight and regulation are seemingly just over the horizon but the question then becomes, will this be a deal breaker for new cryptocurrency investors?

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