Regulation
Decentralization vs. Regulation: the crossroads of the crypto community
Symbol of law and scales of justice on wooden table in legal office
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Decentralization is the most fundamental value of the cryptocurrency space, as well as the main barrier to its adoption. While decentralization empowers individuals and fosters innovation, the lack of clear rules and control has attracted bad actors and powered concerns about financial stability, money laundering and consumer protection. Governments are struggling to formulate clear rules capable of responding to the fundamental changes brought about by this new technology.
The industry has suffered from the consequences of its lack of clear rules, which increases pressure for regulation in the cryptocurrency space. Amid restless regulators, skeptical investors and die-hard decentralization purists, new projects are emerging that aim to find common ground.
Illicit activities in the cryptosphere
Data from Chainalysis shows that illicit activity in cryptocurrencies has seen a rapid increase in recent years, peaking in 2022 with over $39.6 billion in funds stolen by scammers and hackers. Even though 2023 saw a decline to $24.2 billion, the amount stolen remains large enough to deter many investors from participating. According to Security.org’s 2024 Cryptocurrency Adoption and Sentiment Report Report, 44% of participants who do not own cryptocurrencies said they would never buy. At the top of the list of reasons given was a lack of government protection.
The push to impose rigid regulations on the cryptocurrency space escalation after the collapse of the FTX exchange in 2022. Little has changed in the last two years, the same pressure persists. There were little ones initiatives However, to increase regulatory oversight of cryptocurrencies, a comprehensive solution has not yet been developed. The result is a decidedly anti-industry bias among lawmakers and regulators.
Last week, US Treasury Secretary Janet Yellen highlighted the need for strict regulatory measures against cryptocurrencies. declaring“Congress should pass legislation providing for regulation of stablecoins and the spot market for cryptoassets that are not securities.”
According to Undersecretary Brian Nelson, who said on February 13, “Looking forward to discussing Treasury’s busy month of action to protect the U.S. financial system from illicit financing,” the government rolled up its sleeves for a comprehensive regulatory framework for cryptocurrencies.
Blockchain Infrastructure Solutions for Regulatory Compliance
The regulatory and legal requirements of the old financial system have long been enforced by the justice system. In an administrative state, courts resolve disputes between regulated entities and law enforcement officials, ensuring that businesses receive due process and that the industry meets its legal responsibilities.
However, this tool has proven useless in the cryptocurrency ecosystem due to the lack of central authorities capable of receiving and administering court decisions. Regulators have therefore sought to impose very cumbersome and impractical workarounds, such as requiring cryptocurrency miners to apply KYC/AML rules on unhosted wallets.
A new alternative seeks to provide infrastructure for blockchains themselves to interact with official government courts. The main supplier is Jurat, which claims to ensure court connectivity without sacrificing decentralization through its “Judicial Manager” functionality. We reached out to Mike Kanovitz, CEO of Jurat, for comment. He described the need for such protocols, saying: “The future of cryptocurrency is not about clinging to rigid anti-government ideologies, but about assuring future adopters that their legal rights will be effectively protected. Blockchains with our justice systems can pave the way for the clear legal frameworks needed to unlock mainstream adoption and protect consumers who choose to entrust their wealth to a blockchain.
The protocol implements on-chain legal decisions, allowing legal recourse in cases of fraudulent or erroneous transactions without resorting to centralization or intermediaries.
Regulation for blockchain, decentralization for traditional agencies
The idea of a regulated blockchain offers a double advantage. On the one hand, this facilitates the debate between decentralization and regulation, while on the other hand, it offers traditional business players a window to integrate blockchain technology into their systems.
On the regulatory side, automated regulatory enforcement will provide regulators with new options for implementing their policies on blockchains and allow them to demonstrate presence and control to combat illegal activities. If there is a dispute over a topic, regulators can raise the issue in court, just like with off-chain matters. If the judge agrees, regulators can freeze or ban on-chain smart contract assets, preventing further illegal activity and protecting investors.
On the cryptocurrency side, a regulated blockchain will result in increased legitimacy, trust and confidence, which could lead to increased adoption and attract institutional investors and commercial users who were previously hesitant to enter the crypto space .
From a broader perspective, the ability to resolve the legal rights of digital assets on a court-connected blockchain could leverage real-world asset tokenization technology, knowing that legal remedies are readily available within the blockchain itself. This would pave the way for blockchain to become a mainstream technology in all areas of business, driving the efficiency and productivity promised by the technology.
As a technology, blockchain is capable of many things, including storing large amounts of data and automatically executing certain actions when certain conditions are met. Linking to court decisions and reflecting them on-chain will allow regulators to do their jobs effectively in the blockchain sphere. As regulators cultivate blockchain’s capabilities to regulate cryptocurrency markets, the cryptocurrency space can provide a greater sense of security and reach out to skeptical investors.