Understanding Three Challenges That Make Cryptocurrency Regulation Difficult For Nation States


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

Decentralization

Decentralization is fundamental to the nature of cryptocurrencies. It is the principle behind blockchain technology, which offers cryptocurrency users security, freedom from censorship, and privacy. The technology, on the contrary, also has some drawbacks, such as the inability to reverse incorrect transactions and the permanent loss of funds in case of forgotten private keys. Since the benefits outweigh the drawbacks, decentralization in cryptocurrencies was preferred, also to give people an alternative to centralized financial services.

Decentralization has existed in other forms before cryptocurrencies. However, anticipating its impact on money is something new for regulators. Centralized authorities, such as central banks, are structured to oversee monetary policy and flows in a country. Cryptocurrencies, by contrast, do not have a central authority, jurisdiction, or uniform policy. How can a single government oversee all decentralized cryptocurrencies?

Given the cost of implementing regulatory requirements, it is easier to appreciate the potential cost of regulating cryptocurrencies. This is how different countries end up banning the use of cryptocurrencies. The bans also result from numerous scams that damage investor confidence. Regulators try to act in the best interest of their citizens, as both investor and capital protection are key objectives for them.

Today’s rules may not have existed decades ago; a lot of collaboration brought workable frameworks for companies and regulators. The very effort towards collaboration is what will make the complexity of cryptocurrencies easier for regulators to navigate.

Protocol and Governance Diversity

Different cryptocurrencies have different rules, protocols, and governance systems. Bitcoin
BTC
, 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, and their founders choose to remain anonymous. Others have fully formed companies, boards and staff. Based on principles such as “code is law”, some companies adopt flat structures, eliminating hierarchy altogether.

Contrast this with centralized structures, where there are clear responsibilities. It’s easier to meet established regulatory requirements, such as compliance and reporting. How do crypto companies comply with financial reports? Who is responsible for financial losses in a bear market? Who tracks suspicious or fraudulent activity? Where can they report these activities? Therefore, the introduction of decentralized governance in finance has been complex considering some of these aspects.

The differences in protocols and governance mechanisms have basic principles about them. Appreciating these basic principles will be a great starting point for building a better understanding of crypto governance.

Diversity of Jurisdiction

Many cryptocurrency companies move to countries with friendly regulations. A ban in one country triggers a shift to another so business can continue for companies interested in growing in the crypto industry. There is an ironic existence of the need for enabling regulation, yet cryptocurrencies, by design, were never formally regulated. Cryptocurrencies were created for peer-to-peer use, ideally valued and used by individuals.

If people individually understood the use and risks of cryptocurrencies, perhaps this would reduce the need for regulation. However, many people still don’t understand how crypto works. Others see no need to use it at all. The value of cryptocurrencies is very subjective at the moment. These aspects come to the fore for regulators. 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 know the impact of making Bitcoin legal tender when its design is a peer-to-peer payment system. The thing to appreciate in this is that people, businesses, and regulators are having ongoing discussions about the potential value and impact of cryptocurrencies in their countries. It’s perfectly fine that any country right now doesn’t have all the answers on how to regulate this dynamic industry. What would be worrying would be sweeping the issues under the proverbial rug.

future perspective

One way to bridge the gap between crypto governance and regulation is to create forums for regulators to collaborate with crypto industry players. It will depend on the strength of the relationship between regulators and industry players. Consequently, short courses, sandboxes, and small wins make up three progress points for this complex area. A better understanding of the potential of these tools and this dynamic ecosystem is the end result. Just because it’s currently difficult doesn’t always mean it will be impossible to regulate. Patience with the process will pay off for years to come.

Disclosure: I own bitcoin and other cryptocurrencies.

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