26 January 2018

Blockchain technology: The role of regulators

by Daniel Evans

Blockchain technology might make regulators much more favourable towards free trade.

As discussed in the previous pieces of this short series, cryptocurrencies are beyond state control and they’re versatile.

Regulators which have been open-minded, permissive and flexible have proven the most successful so far. The technology itself necessitates this kind of response.

There are many regulators (e.g. financial, food, medical, gambling) with varying mandates (e.g. consumer protection, market integrity), across the world. Blockchain technology’s multi-functionality often brings it under a number of different, competing regulatory purviews. Today’s taxonomies don’t work.

For example, different regulators have defined Bitcoin as a currency, technology, commodity, payment network, service, or property. Only when it’s defined can you decide which other rules apply. Is VAT applicable? Is it exempt from capital gains tax? Do anti-money laundering laws apply? If it’s like a contract for difference, does it fall under gambling regulations, not investment?

The wisest regulatory responses have so far withheld judgement about the technology itself and recognised that it is practically impossible to regulate. Instead they’ve created “sandboxes” or “frameworks” and targeted certain identifiable users of the technology, for example companies which handle crypto-assets on another’s behalf. The approach is more about addressing malpractice, theft, and fraud rather than prescription about what you can or cannot do before you’ve even started work.

This creates a very favourable environment for free trade.

Longer term, this kind of regulation is likely to become more difficult. Privacy is improving and it is possible to encrypt and decentralise more and more services, replacing identifiable middle men with better technology.

Even on the simplest level, today, in some more serious cases, people are using Bitcoin to escape currency controls and hyperinflation. Two years ago a co-founder of a very popular Bitcoin wallet told me that they believe they have 200,000 users in the world’s most economically restricted country. Some prominent world leaders have publicly voiced concern about the ability to enforce taxes if everybody’s walking around with a Swiss bank account in their pocket.

Free traders are not completely against regulation; they more accurately believe it should have certain goals and methods and has certain limitations. As explained above, some regulators are already adapting.

They may have to adapt further.

Perhaps regulators will compete to offer a better service. Private sector standard-setting bodies already do this, like trade associations, trade unions, guilds, or quality assurance businesses. Jurisdictions already compete with each other as domiciles for businesses.

There are plenty of competitive free trade reasons to set standards, submit to oversight, and boost your business’s reputation.

The good news for regulators is that they are already very well prepared. Many are already technically established as incorporated companies which publish annual businesses plans. Many already have rules against inordinately hindering business.

There is a lot more work to do to improve the technology but the general direction is clear. The knowledge, mathematics, encryption, and its dissemination on the internet, mean that blockchain technology is here to stay.

Regulators are already changing. So far it’s proving favourable for free trade.

This is the third of four short pieces explaining blockchain technology: cryptocurrencies explained; smart contracts explained; the role of regulators; rethinking property rights.

Daniel Evans

Daniel Evans is part of the team that started the Gibraltar Stock Exchange (GSX). He has owned bitcoins since 2010. The GSX is starting a crypto-asset market, the Gibraltar Blockchain Exchange. This article does not necessarily reflect the opinion of the Gibraltar Stock Exchange.