Sure, they oblige to some kind of rules, but these rules are inherent to their own nature. Like most enticing things, cryptos are still delightfully unregulated by the official law.
But is this a good or a bad thing? Will cryptocurrencies’ best trait become their downfall?
To understand the complexities of the answer, one must first get familiar with blocks, chains, forks, and all other digital constructs set to govern the rules that all cryptocurrencies must abide by.
Blocks, Chains, and Forks
First and foremost, cryptocurrencies are not technically currencies at all. In layman’s terms, they are digital assets, “a speculative asset”, or a commodity, according to the SEC.
A better, more precise way to describe them would be a “decentralized consensus network”, which means that all participants in the blockchain need to validate the crypto transaction and thus form a consensus to approve it. This adds another block to the chain, right next to pre-existing blocks.
A fork, which can be soft or hard, happens when all participants agree to initiate an update in this open-source system, such as a new software code set to improve the existing chain.
When this improvement is compatible with the legacy system, the fork is soft. But, when the improvement is not compatible with the older system, the chain of validated blocks splits in two, thus forming a hard fork.
And this, among other things, is what makes crypto values go up and down.
Implications for Business
With cryptocurrencies slowly outgrowing the hype, it’s becoming obvious that this new way of paying for goods and services could pose a challenge to fiat money.
In light of this, businesses big and small are starting to introduce Bitcoin and other currencies to their payment systems, both to keep up with the pace of the growing demand and to engage crypto-savvy customers. Another growing trend is the rise of cryptocurrencies in places where central governments fail to deliver economic stability such as Venezuela, Turkey or Argentina.
But cryptocurrencies keep forking into rivaling chains, thus causing further imbalance in an already imbalanced system. Not only are businesses failing to find ways of attributing a more constant, tangible value to cryptos, but they are also at risk of entering the digital economy in an unfortunate moment, marked by the collapse of public trust. Crypto is still too unstable for the business world.
On the other hand, it offers numerous benefits to both entrepreneurs and their customers.
Apart from the fact that companies that accept cryptocurrencies as a form of payment could expand their customer base, this digital asset can also reduce payment processing fees and eliminate the risk of questionable chargebacks. Thanks to smart contracts, these transactions are simply more convenient.
Lack of Crypto Regulations
What frequent hard forks showcase is that these blockchain architectures lack robust governance frameworks. This makes them “prone to patterns of re-centralization: they are informally dominated by coalitions of powerful players within the cryptocurrency ecosystem who may violate basic rules of the blockchain community without accountability or sanction,” as explained by Dr. Phillip Hacker, LL.M.
Though hailed as crypto’s best trait, the lack of official regulations actually contributes to their high degree of volatility and uncertainty concerning their future development. Dr. Hacker adds, “This is deeply problematic as cryptocurrencies become more integrated with the traditional financial and legal system.” It also concerns businesses that are introducing cryptocoins to their payment systems.
The Calling for ‘Smart Regulation’
How should we regulate cryptocurrencies then? Apparently, it depends on which country you ask.
While countries like Russia, South Korea, and China are cracking down on crypto, others are moving in a more favorable direction for the blockchain community (and the entire digital economy with that). Apart from this technical flaw manifested in frequent forking, blockchain is still a revolutionary piece of tech that should not be red-taped, but supported with a suitable kind of crypto framework.
On September 7, financial representatives from the European Union met in Vienna to discuss further steps for regulating cryptocurrencies. It’s clear that the EU will move towards adoption of certain cryptocurrency rules. It’s clear that since there are very few rules for the crypto-economy in Europe, the rights of investors are not protected. This means that honest entrepreneurs have to compete with individuals and organizations that use criminal techniques.
Moreover, the EU should be a pioneer of smart and flexible regulation of the crypto-economy setting optimal rules equal for everyone. Smart regulation will build trust in the crypto-economy and enable the economic development in Europe.
This ‘smart regulation’ should not stifle innovation and creativity that are inherent to blockchain. Balance must be found between cracking down on crypto and blindly supporting its growth, and the right place to look for it may be the “crypto nation.”
Lithuania has earned this title by establishing practices for when businesses in the crypto space need to apply anti-money laundering and securities law. It also clarified taxation and accounting aspects. Others are following such footsteps by implementing tax regulations that all owners of cryptocurrencies and participants in crypto transactions will have to abide by. The problem is recognized, and the solution will be here very soon.
Vytautas Senavicius Legal and Financial Market Regulation Expert at Hodlfinance.io. Ph.D. in Law, partner at one of the leading law firms, TVINS, Chairmain of the Lithuanian Crowdfunding Association.