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The Cryptocurrency Enigma

August 10, 2021

Crypto is unregulated, decentralized, and often hard to trace for transactions, given how blockchain works. It brings unprecedented freedoms for many projects – and an almost unparalleled capacity for fraud across the space. To this end, many countries wish to PROTECT crypto buyers/investors from fraud and manipulation in the markets - but to do this, it'd essentially take away some of those core identities, such as decentralization and anonymity.

But eroding crypto's very core identity to protect those who use cryptocurrency--is that the right decision? SEC boss Gary Gensler says, yes: Just like traffic lights and speed limits/traffic signs helped push cars and highway driving mainstream, regulation on cryptocurrencies will have a similar effect. It's the hope that offering some form of regulation/security with blockchain will help drive cryptocurrency to be a mainstream monetary alternative to traditional currency systems.

But is he right? To answer this, we need to know if the SEC even has the power to enact such regulations. And, as of 2021, about 70 years of case law prevent the SEC from just arbitrarily passing laws that affect cryptocurrency in this manner.  There has to be congressional/senatorial oversight and approval – and most likely an actual LAW signed into the books treating cryptocurrency as a traditional currency.  Once those law(s) pass, the SEC, headed by Gensler, can enact those regulations and rules as they see fit. So, the SEC cannot just set these rules down without some approval. When one examines early car regulatory history, traffic regulation had much the same issue – one couldn't just regulate them without first passing standards and laws that all 50 states had to agree to remedy to make driving safe mainstream.

But, the question remains: is regulation the right choice? Right now, cryptocurrency, during the pandemic, has gained mainstream recognition, has seen a massive increase in projects, companies, and users buying and selling, and has seen an almost exponential rise in fraud across the spectrum. So, is it time that we, as a crypto community, understand that regulation is necessary to prevent this fraud, or do we hold fast to the core ideals of cryptocurrency and accept that the scam, no matter how rampant, will exist? We 'suck it up', so to speak, in hopes that the technology will evolve, eventually, enough to make fraud less likely?

And, that is making the current infrastructure bill in the Senate stall -- as to pay for that bill, they must enact SOME form of taxation on cryptocurrency within the United States – and part of what is spurring those taxation methods is fraud within the community. So, the bill would grant the ability to tax cryptocurrency profits, much as they do with most other real property, to pay for the social remedies within the infrastructure bill. And, the driving force behind the taxation is the rise in crime, international or otherwise, in the crypto community space, which would allow the government bodies, such as the SEC, to enact rules to protect holders and investors in the space.

IT'S A BIG JUMP for the bill's authors and a potential deadlock that prevents a much-needed infrastructure bill from passing the senate. But, it is what the SEC is asking for – and we, as the community need to decide if the concept of decentralization (one of crypto's core values) is worth the protection that regulation gives us. And, unlike rules proposed last year, the SEC isn't offering direct taxation to benefit the United States government, but to fund a social program while enacting laws and regulations that help prevent fraud… it's a great framing of something most in the crypto communities do not want – and, ultimately, the penultimate way to pass this type of regulation – for if the community balks against it, they are essentially saying 'no' to helping their fellow man.

Devious. But, if you think about it, rather ingenious. Last year, the SEC's proposed taxation plan classified cryptocurrency as actual monetary units – meaning real currency. And, in the 2021 tax code, you were required to report your cryptocurrency assets. But, significant companies, crypto projects, and even BitCoin pushed backed VERY HARD on the proposals. Why? Because it seemed like a 'money grab' and a way to cripple the power that cryptocurrency had fought so hard to build up over the years. To most, it was a direct attack on cryptocurrency. So, this new 'manner' of proposing cryptocurrency taxation as a charitable means to fund the needed infrastructure bill – while still facilitating the same type of money grab the government is known for – is framed in a much easier-to-swallow pill: Helping your fellow man. Again, I say Devious, but ingenious – perfect timing, given the pandemic.

Is it time? DO we give up some of the core tenants of cryptocurrency for safety? It is unlikely that crypto will evolve to the point where decentralization will protect users who invest (buy/sell crypto) and those who hold, without some form of oversight. After all, as crypto winds its way deeper into the economy, scientific communities, medical, and even educational fields, access to personal information across the crypto space will become standard – and protection of that information will be required.  Ergo, we balance the concept of anonymity and decentralization while at the same time putting our very information out there on those systems that claim to be decentralized. The idea of decentralization balks at the notion of regulation – but monetary assets require some form of regulation.

Thus, the enigma remains – do we sacrifice our decentralization and anonymity for just a tiny crumb of safety? Most crypto users say no. They are willing to live with the risk of being scammed/defrauded out of their hard-earned monies by shady communities and projects. Why? They hope that cryptocurrency will eventually reshape currency and information interchange across the planet and thus make fraud much more difficult given how blockchain will evolve.

That's a lofty ideal – hoping that blockchain will evolve to the point where decentralization and anonymity balance against fraud across almost all information systems across the planet. And, honestly, at the present level of development, not something that's likely to happen anytime soon. So one must narrow their focus to the present – and consider regulation as an option for decentralized currencies and projects. Is it the right thing? Who knows? But is it necessary? Again, who knows? By its very nature, cryptocurrency is so new that most of the regulations and how they would work are also...well, new. I believe, ultimately, that it can. But a path forward hasn't been found to bridge those two concepts yet without making one side feel the other is being disingenuous or greedy.

So, the enigma remains. The writing is on the wall: There WILL be regulation – but to what extent? No one knows. And is it good? Again, no one knows – it's a waiting game. And, honestly, one that most of us knew was coming for quite some time. So, what do you prefer? Sacrifice the key tenants of crypto and pass the infrastructure bill, or keep crypto decentralized, even if there is significant potential for rampant fraud?

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