Why Crypto Regulation Is Bad

Regulation – just the word was once enough to cause chaos in the crypto sector. One of the major drivers said to be powering the success of blockchain is a libertarian and anti-establishment set of beliefs, coupled with conceding to regulatory bodies trying to fit into the set financial infrastructure appears to go against the beliefs upon which the blockchain network was designed.

Yet it has now become clear in the last 12 months that for blockchain to succeed, there has to be some degree of assimilation with the traditional way of operations. Blockchain as a technology has resulted in the true peer-to-peer borderless transfer of value coupled with innovative methods of raising capital or investing in promising projects.

However, there is the other side of the coin. Crypto has been used as the main exchange of value for illegal activities, and people are exploiting uneducated investors via scams. As detrimental and anti-crypto as regulation once appeared, some operators in the crypto space are gradually warming to, and even welcoming the imminent increase in the regulation of the blockchain space.

What are we all afraid of? What does ‘crypto regulation’ mean?

Whenever regulation is mentioned in the crypto context, it mostly references two main concepts: Anti Money Laundering (AML) and Know Your Customer (KYC) regulations, and all the regulations that surround the issuance and trading of securities. Regulations are developed for a reason. In the case of securities, the intent of regulations aims to protect the investors and guarantee that funds are used for the intended legal purposes.

Exclusion Of Valuable Projects

Although it might be true that a higher barrier to entry mostly boosts the general quality of projects in the crypto sector, it might also undermine high-potential projects because of the financial and regulatory restrictions that managing a complaint issuance exerts on the smaller, capital-starved firms.

ICOs and cryptos grew rapidly in popularity in huge part because they offered investors the chance to invest in projects quicker than it is possible with the current securities laws and fundraising constructs. On the flip side, early-stage firms can access capital rapidly and readily to help finance the development of their products via the ICO model.

The ICO model was quite popular because of its simplicity. Firms with great ideas and products may readily raise funds without needing to spend time and money determining how to structure offerings and what rules and regulations they needed to follow.

Investor Exclusivity

Classification of tokens as private securities for the issuers pursuing Reg D or Reg S exemptions majorly reduces the potential investor pool by restricting those who can invest based on the accreditation standard. Issuers are allowed by the SEC to sell to non-accredited investors outside the United States, but the issuers need to comply with all investor local regulations, some of which include their accreditation rules.

Accredited investors account for a small segment of all investors in the US, and excluding the non-accredited investors from investing in private issuances restricts the issuer’s ability to raise capital while denying the “unsophisticated” investors the chance to invest in the early stage, high-potential projects.

Interestingly, the accreditation standard was designed to protect the less financially savvy people from investing in private ventures with a limited amount of information. This concept is noble: protect the inexperienced from being exploited.

But, the execution of the accreditation standards is ham-fisted. Using net worth and income as a proxy for investor sophistication is inaccurate. Using tests of financial acumen as a means for investors to get accreditation status would assist in closing the gap between knowledge and wealth. The accredited investor limitations possibly increase wealth inequality by denying less wealthy investors a chance to invest in the traditionally high-performing private equity industry.

Poor User Experience

This drawback is related to the experience that users encounter when trying to buy or trade tokens. While not as important as the other considerations that affect the whole fundraising network for private firms, it affects the ease of investment.

Previously, the token investing experience was simple: users could just create an account with their email to access the token market. Customer identification processes have gradually ramped up from there, with ICO issuances and exchanges needing more identification documents and information to permit entry onto their platform.

Customer identification procedures are mostly implemented as part of KYC/AML – a program perfectly designed to fight money laundering and terrorism financing. Most people do not engage in these illegal activities. Therefore, these procedures are an inconvenience to them. Nonetheless, these programs are put in place to minimize criminal activities. Hence, a little extra paperwork is a small price to pay.