Understanding three challenges that make cryptocurrency regulation difficult for nation states

Cryptocurrency regulation remains a headache for nations and there doesn’t seem to be an easy way around this difficulty. Many say that innovation trumps regulation. While this is true, building a bridge between innovators and regulators is necessary for investor confidence. This article will look at three aspects that make cryptocurrency regulation in Africa difficult.

Decentralization

Decentralization is central to the nature of cryptocurrencies. This is the principle of blockchain technology, which provides cryptocurrency users with security, freedom from censorship and privacy. The technology, on the other hand, also has some drawbacks, such as the inability for people to reverse erroneous transactions and the permanent loss of funds if private keys are forgotten. Since the advantages outweigh the disadvantages, decentralization of cryptocurrencies is preferred, also to offer people an alternative to centralized financial services.

Decentralization existed in other ways before cryptocurrencies. Anticipating its impact on money, however, is new for regulators. Centralized authorities such as central banks are structured to control monetary policy and flows in a country. Cryptocurrencies, on the other hand, have no 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 cryptocurrency regulation. This is how several countries end up banning the use of cryptocurrency. The bans are also the result of numerous scams that undermine investor confidence. Regulators seek to act in the best interests of their citizens because investor and capital protection are key objectives for them.

Today’s rules may not have existed decades ago; numerous collaborations have made it possible to create functional frameworks for companies and regulators. The collaborative effort itself is what will make it easier for regulators to navigate the complexity of cryptocurrencies.

Diversity of protocols and governance

Different cryptocurrencies have different rules, protocols and governance systems. Bitcoin
BTC
, for example, it has the Bitcoin Foundation, which is made up of investors and developers who make protocol decisions. Some cryptocurrencies have no apparent formal leadership, with their founders choosing to be anonymous. Others have fully trained companies, boards and staff. Based on principles like “the code is law”, some companies adopt flat structures, eliminating the hierarchy altogether.

Contrast this with centralized structures, where responsibilities are clear. It is 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? The introduction of decentralized governance in finance was therefore complex in light of some of these aspects.

Differences in governance protocols and mechanisms have underlying principles about them. Appreciating these foundations will be a great starting point to better understand cryptocurrency governance.

Jurisdictional diversity

Many cryptocurrency companies are moving to countries with favorable regulations. A ban in one country incentivizes relocation to another so that business can continue for companies willing to expand into the cryptocurrency industry. There is an ironic existence of the need for enabling regulation, but cryptocurrencies, by design, were never meant to be formally regulated. Cryptocurrencies have been designed 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 have yet to understand how encryption works. Others don’t see the need to use it at all. The value of cryptocurrencies is very subjective at this point. These aspects are at the forefront of regulators. Why should they devote resources to something that only 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 not yet proven its significant value for other countries to follow suit. Furthermore, it is still too early to tell the impact of fiat money when designed as a peer-to-peer payment system. What is to be appreciated is that people, companies and regulators have ongoing discussions about the potential value and impact of cryptocurrencies in their countries. It is entirely acceptable for a country to not have all the answers on how to regulate this dynamic sector at this point. What would be troubling would be to hide problems under the proverbial carpet.

Future prospects

One way to bridge the gap between cryptocurrency governance and regulation is to create forums where regulators can collaborate with players in the cryptocurrency industry. It will build on the strength of the relationship between regulators and industry players. Therefore, short runs, sandboxes, and small wins are three advancement points for this complex area. A better understanding of the potential of these tools and this dynamic ecosystem is essential. The fact that it is currently difficult does not always mean that it will be impossible to regulate. Patience with the process will produce good results for years to come.

Disclosure: I hold bitcoin and other cryptocurrencies.

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