Cryptocurrencies – Taking Regulation in a New Direction?

The creation of bitcoin in 2009, the first cryptocurrency, was heralded as revolutionary by some, but widely criticised by many, especially in the financial services sector, as a ‘fad’ or gimmick. Its ability to operate without the need for third party oversight or Government intervention was an attractive prospect, especially post the Global Financial Crises where trust in Governments and banks had been damaged. Yet its connection with scandals and use for illegal purposes (Silk Road, Mt Gox, Terra, FTX) placed it firmly on many regulators radar. Its use of consensus, although not new, was novel in conjunction with protocols, algorithmic authority and the blockchain, and emphasised the creator’s desire to remain outside of any state regulatory framework. This caused a conundrum for central banks whose main focus is financial stability and prudential supervision, and many adopted a wait and see approach. Initially the EU responded with guidance notes and policy documents, but the recent introduction of the MiCA (EU Markets in Crypto-Assets) regulation shows not only a desire to close regulatory gaps but also an acknowledgement that crypto-assets have a place in the future of financial services. This paper explores some of the conventional tools and methods being used and put forward by regulators to try and regulate cryptocurrencies, while also looking at how Bitcoin and Ethereum already incorporated regulation into their protocols by using various tools, like voting, consensus, community censorship, soft forks, hard forks, ‘trustless’ bridges to name a few. It examines the duality of how regulators respond to a disruptor like cryptocurrencies and how cryptocurrencies are impacting the emergence of a new regulatory framework. As the culture clash between crypto enthusiasts and crypto sceptics continues to dilute and the merits of cryptocurrencies becomes clearer, regulators may find benefits in the technology too.