In a November interview with the BTC Times, Michael Saylor dropped a bombshell on his newly-found following.
“Stop talking about regulatory arbitrage. Censorship-resistance, privacy, and tax evasion are bad ideas. We hate that,” he told the BTC Times back then. “People with billions of dollars don’t want to invest in crypto networks that support anarchists.”
Safe to say, this didn’t particularly curb Saylor’s rise in popularity as one of, if not the most vocal Bitcoin advocate for public companies. But it left an aftertaste among privacy-conscious bitcoiners.
How could someone who seemed to have so perfectly grasped the concept of Bitcoin as an alternative to the centrally controlled financial system possibly lean so strongly towards regulating it?
The reality is that Saylor speaks from the position of an institutional investor, the corner of the market that is currently buying up substantial chunks of the available Bitcoin supply and demonstrating that Bitcoin’s popularity stretches way beyond the cypherpunk circles; as the adventurous first-movers on Wall Street test the orange waters, all accredited eyes are on them.
For these investors, Bitcoin’s most attractive feature tends to be its scarcity, which elegantly incapacitates central banks from arbitrarily printing it into oblivion. Privacy and transactional censorship-resistance are often way lower on the agenda, especially for public companies that are required to disclose their holdings to the local regulatory body anyway.
In fact, clear regulation would likely be loved by institutions, as it would nudge Bitcoin onto the main stage of the world’s capital markets and not only boost its legitimacy in the eyes of professional investors worldwide, but also enable further growth of Bitcoin’s surrounding ecosystem of service providers.
As large investors seek access to Bitcoin en masse, they’re triggering a new dimension of FOMO — the ball is in the regulators’ court, and policy makers can no longer turn a blind eye to Bitcoin.
So Regulation Is Coming. But What Will It Look Like?
With institutions piling in on Bitcoin, it has become apparent that Bitcoin indeed was no fad. It didn’t die in 2017, and it can’t be willed away and dismissed as a temporary internet phenomenon. So at long last — and even though some bitcoiners may not like it — regulatory bodies around the world are looking to increase regulatory oversight of this new asset class. Only yesterday, Fox Business reported that, according to unnamed sources, the Biden administration was “in the early stages of developing a regulatory approach to the crypto markets.”
As was to be expected, regulators today are primarily focusing on fiat on- and off-ramps, the most centralized players in the Bitcoin ecosystem that must comply with whatever rules are imposed on them.
One such new regulatory measure can already be seen in action in the Netherlands, where the local central bank requires exchanges to ask their users for the purpose with which they intend to buy bitcoin, as well as which wallet they use. Dutch exchange users also need to prove ownership of their addresses via a screenshot or signed message. Local exchange Bitonic went to court over the matter, calling the measures “ineffective and disproportionate” — the proceedings are ongoing, although Bitonic recently celebrated a win when its objections were upheld in court, putting the Dutch Central Bank to react to its objections within six weeks’ time.
Meanwhile, FinCEN dropped a proposed ruling in the U.S. that, if adopted, would require companies to collect personal information such as names and addresses from users who transfer over $3,000 a day, as well as report any transactions over $10,000 per day users send to non-custodial wallets.
The proposal was met with widespread criticism spanning concerns over its poor definition of terms, endangerment of user privacy, and an unusually short period for public comments, which made the process seem suspiciously rushed. The comment period was later amended to allow more time for submissions, 7,669 of which have been filed to date.
Last month, another unpleasant surprise reached the Bitcoin space from the Financial Action Task Force (FATF), which published an amended draft version of its guidance on virtual assets. While initially only focusing on custodial intermediaries, the new draft blurs the line of who is considered a so-called VASP (virtual aset service provider), going as far as to suggest non-custodial network participants may be required to conduct AML surveillance, as well as encouraging developers not to enable peer-to-peer transactions in their software.
But what appears outright Orwellian and seems to go right against the values many prescribe to Bitcoin might not always be driven by malice. Sometimes, it’s just a lack of understanding, amplified by an attempt to apply the same rules to Bitcoin that were originally designed for the legacy banking system.
“In many respects, these regulations are antiquated and do not apply cleanly to the new financial system,” Vijay Boyapati told us on the matter. “Regulators are often slow in understanding and appreciating the nuances of the technologies they’re regulating and more often than not are unable to satisfactorily supervise the industry they’re overseeing.”
Powers controlling the money supply try to act in the interests of the masses, but behave contrary to the common good either from ineptitude or malice.
The result for you as the end-user will be stricter KYC and AML measures. Whether those will be well-adjusted to Bitcoin’s financial system is a different question. They will cost money to implement and maintain, all while possibly not yielding the results regulators are hoping for — because while regulators try to make the Bitcoin network more transparent, bitcoiners are trying to make it more private.
“Over time, I do expect that Bitcoin will be developed to add privacy enhancing features that will make it only traceable at the on-and-off ramps to the legacy fiat financial system,” Vijay said. Base-layer additions like Taproot, transactional tools like CoinJoin, and second layer solutions like Lightning will increasingly blur the lines of ownership, rendering most current policy proposals ineffective beyond the realm of on- and off-ramps.
But not all news from the regulatory corner is as worrisome as what we’ve seen from FinCEN and FATF. Some regulators have shown themselves rather open to Bitcoin: “The recent OCC news where US banks are allowed to treat open-source blockchains the same way they treat Swift, ACH, or Fedwire is a great example,” The Investor’s Podcast host Preston Pysh told us. While it looks as though governments are likely to overregulate in the short term (a prime example being India’s and Turkey’s recent Bitcoin bans), they may eventually come to regret it:
“What I suspect will happen with more time (i.e. 10 years), governments that were too restrictive at the start will need to reverse their policies because it will prevent their countries from remaining competitive in the global marketplace.”
Don’t Want Regulation? Here’s What Will Happen
Chances are you like Bitcoin for its independence from central authorities and perhaps even take some kind of satisfaction in knowing that a hypothetical malicious regulator couldn’t control Bitcoin if they tried. But it would be naive to expect governments will simply leave it to the rapidly growing Bitcoin user base to handle all aspects of their new financial life without intervention.
To varying degrees, most countries will soon begin tightening regulations for Bitcoin businesses and, by extension, their users. Any such regulatory action inevitably affects the growth of the local Bitcoin economy.
“There will always be regulation around Bitcoin through companies providing Bitcoin financial services, such as exchanges and various on-ramps. But there’s a limit to how heavily they can be regulated,” Samson explained. “If the financial burden of compliance becomes too great, then these services will simply shut down or move to a different jurisdiction.”
Similar scenarios will play out on the consumer side if regulators overstep their boundaries: those who want to preserve the privacy of their Bitcoin holdings, be it out of personal preference or out of necessity, will need to vote with their feet and move to more favorable jurisdictions.
For those who can’t, overreaching regulation will feed into the demand for decentralized exchanges, which are poised to become an indispensable alternative for Bitcoin users seeking non-identity-bound bitcoin. Some countries may outlaw these platforms and decry them as money laundering hubs.
Supposedly, most citizens are not keen on becoming criminals in their own countries. Furthermore, regulated centralized on-ramps will be extremely convenient to use, making it easy for most people to accept and comply with the imposed regulations.
In a worst case scenario, this division could further add to the idea of “clean” and “dirty” coins, clean coins being those that can be definitively linked to an individual or a company. Non-KYC coins may be considered illegal, regardless of whether they’re used for lawful purposes or not. “This may fuel the growth of a contorted Bitcoin ecosystem in which ‘illegal’ bitcoin are simply never exchanged back into fiat,” Samson said.
Conversely, countries with favorable regulation will see an influx of Bitcoin businesses and users, and with it large-scale economic opportunities. As such, some might find that with regards to regulation, less is more, according to Preston:
“I strongly suspect the countries that favor the least amount of regulatory features will attract the most economic prosperity moving forward, so it’s going to be an interesting min-max problem for global participants to solve.”
But How Much Control Do Regulators Really Have?
How a country regulates Bitcoin has a lesser effect on Bitcoin and a stronger effect on the respective country’s economy. In imposing certain restrictions, regulators effectively control if and how their citizens can access Bitcoin and Bitcoin-adjacent services — they don’t impact the Bitcoin protocol or network itself. In fact, if they did, it’d be a pretty bad sign, as Samson told us:
A perfectly compliant Bitcoin would be no different than fiat – it could be a tool for surveillance capitalism, and it implies that the protocol and consensus rules would be malleable and sensitive to political whims. The day that well-meaning bureaucrats can ‘fix’ Bitcoin is the day that it dies.
If a country really wanted to get rid of Bitcoin, it could attempt to outlaw mining or running a node. But similar to overreaching regulation of fiat on-ramps, this would simply drive users — and economic opportunities — to other jurisdictions.
An even more draconian possibility is that of governments trying to directly influence Bitcoin governance decisions.
Individual jurisdictions or a collective of countries could attempt to accumulate hash rate and deploy thousands of nodes that only accept blocks mined by “compliant” mining pools, which are pools that don’t include transactions involving blacklisted coins in blocks. Should this happen, we would likely see Bitcoin hard fork into one “compliant” version run by regulators, and one “non-compliant” version supported by those looking to preserve Bitcoin’s key characteristics of privacy and censorship-resistance. And as always, the market would decide which version prevails.
While we shouldn’t discredit such “David versus Goliath” scenarios, it’s important to keep in mind that although financial regulators are often more or less jokingly referred to as Bitcoin’s “final boss,” they aren’t the enemy by default. In fact, many regulatory bodies around the world are actively engaging in dialogue with industry insiders as they try to find their way around Bitcoin. How that will play out for upcoming regulations in different jurisdictions is to be seen.
Ultimately, Bitcoin’s continued growth implies that an extreme overhaul of the world’s financial systems is on the horizon. Bitcoin continues to be mankind’s best shot at the peaceful separation of money and state, and as long as there is demand for that, it will continue to exist — in harmony with countries that embrace it, and in spite of the efforts made by countries that don’t.
The question is, who takes more harm from rejecting Bitcoin: Bitcoin, or the countries that isolate themselves from its new financial paradigm?