As DeFi scams, exploits, and collapses in the digital asset space become more prevalent, the need for comprehensive regulation to protect consumers has been more important than ever. While space has often struggled against oversight from any sort of centralized body, the popularity of modern digital assets and the plethora of applications built using blockchain technology have necessitated the need for some level of regulatory guidance, particularly on Protecting citizens from predatory financial schemes designed only to line the pockets of creators and their stakeholders.
Note: The Cypherpunk group, which originally came up with many of the ideas surrounding digital assets, valued cryptography as a tool to protect against authoritarian governments.
The purpose of this article is to provide an overview of Bitcoin’s role in regulating digital assets and why its differences from most other cryptocurrencies should encourage regulators to see it in a different light.
Last week, Wyoming Senator Cynthia Lummis, in a bipartisan collaboration with New York Senator Kirsten Gillibrand, released a proposal to regulate cryptocurrencies and other digital assets. This primarily relates to safety and tax laws in the United States, but if passed could serve as a standard for other jurisdictions. This proposal is certainly good news for cryptocurrency developers and users; It is designed to ensure that the United States can become a leader in digital asset innovation while protecting its own citizens from fraudulent schemes. While the entire proposal is beyond the scope of this article, the key takeaways, as reported in this article, follow wealth:
- Digital assets, including bitcoin, are to be treated as small caps or commodities. This will make the Commodity Futures Trading Commission (CFTC) the primary regulator of digital assets, rather than the Securities and Exchange Commission (SEC).
- It clarifies the definition of a crypto broker, thereby protecting developers working on bitcoin wallets, lighting clients or other tools from the same reporting requirements that can be imposed on a centralized exchange like Coinbase.
- It requires companies that raise capital from the sale of digital assets to disclose those sales to the SEC.
While this bill codifies space and introduces some authority and oversight, it also ensures that space development is not impeded, a concern previously expressed by Jack Dorsey, among others. Senator Lummis, in particular, has long been a staunch supporter of Bitcoin and, unlike her contemporaries, focuses on innovation rather than just the potential downsides of energy use.
However, Bitcoin’s design gives it some unique advantages that should serve to make it a unique asset in terms of both user protection and broader regulation. First of all, many disclosure and transparency concerns related to other base layer platforms do not apply to Bitcoin (they may apply to companies building sub-plants or other products on top of the Bitcoin blockchain) as there is no centralized organization overseeing this Bitcoin’s operations. You will often hear the saying that bitcoin is the purest form of digital money because it doesn’t offer or even try to offer anything else. Holding Bitcoin does not give you any privileges: you do not have voting rights in any organization, you are not entitled to any rewards in the form of earnings, and you cannot gain control of the underlying protocol simply by buying more of it because of the underlying underlying proof-of-work consensus mechanism. This is not to mock alternative platforms that can offer these features. Finally, many alternative platforms have played an active role in decentralizing the internet and also allowing stablecoins (along with bitcoin) to be an alternative financial tool for those of us who are less fortunate. Rather, it is intended to underline that Bitcoin is the best form of digital money precisely because of its simplicity.
In a previous article, I argued that Bitcoin, and not the broader cryptocurrency market, is helping to combat authorism and act as a tool for financial freedom. A variation of the same argument applies to distinguishing Bitcoin when it comes to thinking about regulatory specifications for digital assets. No centralized party within Bitcoin’s vast ecosystem can exert significant influence over its protocol, nor can any party initiate the creation of new bitcoins to meet a need serving their own interests.
The core ethos that sets Bitcoin apart from other protocols is its decentralization. While many in the industry argue that Bitcoin is actually fairly centralized due to its distribution of supply and the existence of mining pools, the reality is that measuring the decentralization of any protocol – be it a peer-to-peer network for digital assets, a government or your local recreational sports league – goes beyond analyzing quantitative data such as concentration of hash power or concentration of wealth. Rather, perhaps the most important part of measuring decentralization is the decision-making authority that each centralized party has to make long-standing decisions for the protocol. A majority if not all alternative platforms have some form of foundation or organization that makes significant protocol or tokenomic decisions (the economics of the underlying asset). In many cases, there may be some form of governance or voting mechanism that allows holders to vote on specific proposals. While this is certainly more decentralized than your traditional Web 2.0 protocol, let’s introduce Bitcoin’s decision-making protocol.
With Bitcoin, anyone can make a protocol change proposal via a Bitcoin Improvement Proposal (BIP). For the protocol change to be codified, it must be approved by miners whose current ownership does not matter. Most importantly, there is no centralized authority that could influence the miners’ decision. Unlike alternative platforms, Bitcoin is more like software than a company. (The anonymous creator/founder has completely retired from the public eye and has not transacted with his own bitcoin for nearly a decade.)
It is precisely this decentralization that makes Bitcoin a tool for human rights activists and people living in authoritarian countries. It is this decentralization that allows Bitcoin to be a version of sound money and to be an active hedge against inflation. It is this decentralization that regulators and legislators need to consider when designing regulations for cryptocurrency-based assets. Senator Lummis and Senator Gillibrand’s proposal takes a major step in the right direction by explicitly distinguishing between protocols/assets that exhibit characteristics of a traditional company and those that are independent and autonomous and help bring about legitimate change in our society bring about.
This is a guest post by Archie Chaudhury. The opinions expressed are solely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.
