Crypto regulation will be impossible to deliver

So, what’s the point of introducing reams of new legislation around cryptocurrencies? Perhaps, it would be better to save a lot of time and taxpayer money by letting the industry self-regulate, or self-immolate.

In other words, fight fire with fire and leave cryptocurrencies as an unclassified, putrefacating mass of synthetic price bubbles, derivatives, and unbacked yield farming schemes.

The centralised exchanges don’t want this. They want regulation as this solidifies their competitive position and assigns legitimacy. That makes sense, but the exchanges as market makers are responsible for blowing up the price bubbles.

Art dealers in 17th-century Holland worked out they could achieve higher prices for paintings sold at auction, than privately, when they had to contact buyers and negotiate a price.

The making of a market in art is similar to exchanges’ roles in pumping up prices that wouldn’t exist if speculators had to sell cryptocurrencies to each other.

In that sense, the major part of the crypto ecosystem that faces the real world today is the polar opposite of decentralised.

All the major exchanges are centralised in Australia, alongside global leaders like Binance and Coinbase.

Other exchanges like Uniswap style themselves as decentralised because they match buyers and sellers directly in liquidity pools and don’t earn a spread on order books.

The liquidity pools are funded by third-parties depositing crypto for yield, with the fees on the matched trades allegedly covering the yield.

Of course, decentralised exchanges – preferred by more sophisticated crypto investors – cannot offer custody as the asset is only transferred between buyer and seller.

This means any custody rules could not apply to their business and any new crypto regulation would only apply to certain users.

This shows how decentralisation as an article of faith in crypto means any regulation logically just requires a fork to circumvent it.

The more regulation that is introduced, the more forks around it that are logically required if we’re to believe crypto’s decentralised, apolitical vision of finance free from state interference.

At a minimum, more laws are likely to create a two tier industry: one industry playing by some rules designed for its own protection and financial benefit, with the other bypassing the rules as pointless and incompatible with crypto’s original vision.

The result is likely to be more laws that are hard to enforce, easy to circumvent, and potentially redundant in five years’ time.

Bitcoin’s challenges

The crypto masses are already ahead of the regulators and splintering between stakeholders aligned with centralised exchanges and government, versus others welded to the concept of trustless finance.

Bitcoin’s believers, in the trustless finance camp, have even convinced themselves that FTX’s hack and collapse is an industry positive as it accelerates the shift to self custody.

However, Bitcoin’s proof-of-work system required for network security means it’s too slow, expensive, and energy intensive for payments.

This security-driven failure has been brushed under the carpet given Bitcoin hasn’t met its stated purpose as a peer-to-peer version of electronic cash for online payments without the need for third-party verification.

Instead, the growing neurosis around online security, means Bitcoin’s holders must hide it on a hard drive that cannot be hacked when disconnected from the internet.

Hardly the future of money, but a reality check for regulators looking to meddle in an industry characterised by online theft and insolvencies.