Cryptocurrency has been around for nearly 13 years. It began as nothing more than an experiment in decentralised money and has become a multi-trillion dollar industry.
This expectational growth is starting to threaten the powers that and some countries have declared war on cryptocurrency. As crypto continues to succeed, attempts by governments to contain it will only become more common.
Although Bitcoin has been around since 2009, the first cryptocurrency was ecash, created by Computer scientist David Chomp in 1983.
The term cryptocurrency didn’t even exist back then, but the concept of cryptography, which lies at the core of cryptocurrency, is likely as old as a written language. In his MIT lectures on cryptocurrency, SEC Chairman Gary Gensler defined cryptography as, quote, communication in the presence of adversaries.
Cryptography can be found in Egyptian hieroglyphs dating back to 1900 BC when some Egyptian tribes secretly used irregular hieroglyphs to relay important messages. Cryptography can also be found in the browser or mobile application. Without it, anything you Typed on your computer or phone would be visible to everyone on the Internet.
Cryptography is used to ensure that only you can control the coins or tokens in your cryptocurrency wallet. This is a small but significant detail because it’s a big part of why the cryptocurrency is the antithesis of the current financial system.
Cryptocurrency vs Institutions
Any transactions you make using a financial institution, a bank or a broker are also cryptographically secured. However, these assets are not controlled by you. Instead, they are controlled by the institution you’re interacting with, and though they give you a lot of leeway about what you can do with those assets.
Banks can prevent you from making certain purchases, as we’ve seen with Barclays in the UK. Likewise, brokers can prevent you from buying certain stocks, as we’ve seen with Robinhood in the United States.
As physical cash becomes less common and central bank digital currencies are implemented, these institutions’ control over your assets will only increase. The fact that cryptocurrencies allow you to control your assets is why they are valuable and always have value.
Control over your assets isn’t enough, however, because even if an institution can’t control your assets directly, they can still control those assets indirectly through coercion and sanctions.
Privacy vs KYC (Know Your Customer)
Most cryptocurrency transactions are publicly viewable, and that means all an institution needs to do is monitor where those transactions are going and apply pressure where applicable. These pressure points include exchanges to crypto payment gateways, OTC desks, and even individuals whose identities have been linked to their cryptocurrency wallet address with KYC.
Once a pressure point has been identified, punitive measures can be applied to the associated party, discouraging them from interacting with the entity the institution is targeting.
The perfect protection against this scenario is privacy, and this is the real reason why privacy-oriented cryptocurrencies and projects are public enemy number one to regulators around the world.
While it is true that privacy coins are sometimes used to pay for all manner of immoral material, it’s also true that all attempts at curbing criminal activity through financial regulations have done anything but.
According to a 2020 paper from the Journal of Policy Design and Practise quote, anti-money laundering policy intervention has less than 0.1% impact on criminal financing.
It is simply because human corruption cannot be regulated. Every regulatory authority consists of humans whose cooperation can be purchased by criminals for a fee. Everyone has a price. The important thing is to find out what it is, as Pablo Escobar is supposed to have said.
Regulators vs Centralised Exchanges
Now, despite these facts, it’s likely that regulators will continue pressuring centralised exchanges to delist privacy coins on the grounds that they facilitate money laundering and other criminal activities.
This pressure doesn’t have to be that direct. For example, Kraken and Binance US are currently planning to IPO as Coinbase did. How much do you want to bet that regulators will tell them they have to delist Monero (XMR) first. Even though Monero isn’t available on Binance US, it is trading on Binance.
And given the close relationship between the two exchanges, this is a move that regulators could very well try and pull. It’s not just Manero either. Over time and through various methods, it’s likely that every Privacy coin will be delisted from centralised exchanges with few exceptions.
Some survivors might include Privacy coins built with compliance in mind, such as Secret Network, which keeps smart contract transactions private, but lets you reveal your token holdings to anyone who asks.
As for Monero, the recent completion of its long-awaited atomic swap technology will hopefully allow XMR to maintain enough market liquidity and accessibility via BTC.
Cross-chain crypto projects such as Thor Chain (RUNE) are also working on integrating XMR, which would be ideal substitution for centralised exchanges.
Banks and Brokers vs Decentralised Finance (DeFi)
The second crypto niche that will likely get wrecked by regulators are decentralised finance. This is because DeFi protocols allow you to do things like lend, borrow and save without a bank and trade stocks and commodities without a broker.
And much of the current financial system consists of banks and brokers. The total value locked in DeFi protocols is currently around $180,000,000,000.
And though this might not sound like much, that’s more than a 400 X increase since last spring. And the trend here is pretty obvious.
It’s only a matter of time before DeFi becomes big enough to challenge the banks and brokers it’s been built to replace. These institutions aren’t going to go down without a fight, and we’re not their only foes. It turns out that a lot of big investors are big fans of DeFi.
Some of them are fighting the banks behind the scenes for influence over regulatory bodies like the SEC. Now, the most likely middle ground here is that accessing DeFi protocols will require completing KYC, and the companies behind them will have to register with the SEC and other regulatory authorities.
It won’t be possible to regulate all these DeFi protocols, which could lead regulators down a more destructive path. One of these would be to go after the companies that built the cryptocurrencies hosting these DeFi protocols and force them to collect KYC on everyone using them.
This would be very difficult for a cryptocurrency like Ethereum (ETH), but it is possible to demand from some Ethereum layer twos, specifically Polygon (MATIC).
According to Polygon’s documentation, three of the four smart contracts which connect Polygon to Ethereum are controlled by Multisig wallets, one of which only requires two signatories to change. This means that all regulators would have to do to pressure Polygon is to find these keyholders and tell them to comply.
Select smart contract cryptocurrencies could also be coerced similarly due to their centralisation. If regulators were determined, they could also target Proof of Stake (PoS) cryptocurrencies.
That’s because, in the absence of any elaborate governance structures, regulators could buy up the voting power they need to implement KYC and pressure any well known Wales to vote in favour of their regulatory proposals.
What about Stable Coins?
Another radical measure regulators could employ as part of their crusade against DeFi is to dismantle stable coins. Stable coins are not only integral to DeFi but also cryptocurrency trading. This is because most of the trading volume takes place against USDT and USDC.
Stable Coins growth has been exponential as a result, and their collective market caps total well over $100 billion. Now, the 100 billion dollar mark was hit in August, and that’s when US regulators started to take notice.
The thing is that stable coins have already been a concern in other countries for months. This is because easy access to digital dollars means some countries are at risk of dollarisation. In a worst-case scenario, their citizens could jump, ship and switch entirely to stable coins like USDT and USDC.
The consequence of this is that the country in question would lose total control of its financial sovereignty and would be entirely at the mercy of the monetary policy of the United States. But, of course, this is a preferable outcome as far as the United States is concerned, which is likely why regulators are tiptoeing around the tether shaped the elephant in the room.
This means that the incoming stable coin crackdown will probably look more like a surgical procedure, and the endgame will bring stable coin issuers under the government’s wing. However, this will be a short term measure because the United States has digital dollar plans of its own, and it’s not going to want any competition.
United States will be testing quantum-resistant technology for its CBDC next year. Usd CBDC tests are already technically underway, and, likely, stable coin issuers like Circle and Paxos are not so subtle when participating in them.
In any case, this makeshift roadmap suggests we won’t see an actual stable coin crackdown for at least another year, and this is more than enough time to develop decentralised alternatives.
The scenarios so far don’t sound so bad, and it’s great that there are some countermeasures in place. However, the success of these countermeasures depends on one thing that regulators are also targeting: cryptocurrency custody.
Any cryptocurrency you buy on a centralised exchange doesn’t belong to You until you’ve withdrawn it to your own cryptocurrency wallet.
It would be best if you always did this because centralised exchanges can be hacked, and the more crypto there is on an exchange, the higher the likelihood that this will happen because humans are corruptible.
More importantly, centralised exchanges retain complete control of the assets in your account in the same way that banks and brokers do, meaning they can restrict your account for whatever reason.
This custodial setup is what regulators want for cryptocurrency because it gives them control of every coin and token via the centralised exchange or whatever custodian you’re using to hold your crypto.
It would also make it very easy for regulators to introduce regulations to Proof of State (PoS) cryptocurrencies, as centralised custodians would hold all the tokens that provide the voting power.
The banks and brokers also want this custodial setup so long as they are the custodians because it means they can engage in fractional reserve crypto banking and other shenanigans we see in gold and silver.
The scary thing is that even big crypto investors want this custodial setup because it creates more liquidity in the crypto market. So put, if all the cryptocurrency is being custody somewhere, it makes it much easier to access and trade. This isn’t the case if most of it is being hoddled in self-hosted cryptocurrency wallets.
More importantly, BTC is required to create payment channels on the Lightning network, and if governments continue adopting Bitcoin, they will need BTC for these payment channels. Because of these and other factors, regulators preventing individuals from holding their crypto in the coming years, and it’s worth pointing out that something like this has happened before.
In 1934, the Gold Reserve Act made it illegal for US citizens to hold investment-grade gold on the grounds that it was a threat to economic stability. A similar law could eventually be passed for BTC on the same grounds.
This time around, the difference is that it would be much easier to enforce since almost all cryptocurrency transactions are transparent. This means that it would be easy for regulators to track down any BTC that’s not centrally custody and threaten to punish any identifiable parties who dare to receive that tainted BTC.
The good news is that if these kinds of regulations come into play, someone somewhere will come up with a way to circumvent them, and it’s unlikely they would exist in every country.
After all, some countries embrace cryptocurrencies, such as El Salvador, which is likely to continue. So now you can learn more about the countries that could adopt crypto using the link up there.
Crypto vs Crypto
The last worst-case scenario for crypto and that’s cryptocurrency’s technologies being co-opted by the powers that be.
This seems to be why regulators haven’t put in the effort to kill crypto. This industry is evolving quickly, and the technologies coming out of it are revolutionary. Moreover, because almost all cryptocurrency code is open source, it is easy for institutions to copy and paste what crypto developers have made and tweak it to maximise the control they have over their customers or citizens.
Institutions are currently having trouble implementing their Dystopian creations because of a chronic shortage of crypto developers willing to work for an annual salary worth a fraction of what they would make for building a solid DAP or launching a cool NFT.
However, this dynamic is likely to change as more crypto developers enter the space over time, and many of them will be willing to do this kind of dirty work when the next bear market sets in.
The new Internet?
Not only that, but a few cryptocurrency projects are actively advertising themselves to institutions as the perfect partner on their quest for total control. One of these cryptocurrency projects is the Internet Computer (ICP), and if the name didn’t give it away, its goal is to replace the entirety of the Internet with its own concerningly centralised infrastructure.
The Swiss-based Dfinity Foundation, which built the Internet Computer, seems to have close connections to the World Economic Forum and showcased its creation at last year’s infamous Davos conference.
Using the Internet Computer requires creating a digital identity stored on an immutable blockchain connected to your mobile phone and or computer.
Dfinity Foundation is also creating an operating system called Endorphin, which will connect to the Internet Computer. ICP token-holders govern the Internet computer, and voting power depends on how long tokens are locked up.
This sort of technology is incredible, and the Internet computer is seriously impressive and powerful.
The thing is that this technology can be used for both good and evil. On the off chance that something like the ISP gets implemented by institutions worldwide, it would be next to impossible to escape their control, even with cryptocurrency, because the Internet itself would be compromised. Then again, decentralised wireless networks like Helium (HNT) could offer a way out.
Crypto is here to stay
Early days in the crypto journey, there was heard those wise advice: only invest what you can afford to lose because crypto could go to zero.
It won’t be heard that phrase in a long time, and I think that’s because it’s become clear that crypto will never go to zero. This is simply because controlling your hard-earned assets has an intrinsic value regardless of what the dollar sign says from day to day.
This is something that people are only starting to realise, and it’s reflected in the exponential growth cryptocurrency has seen over the years. It’s don’t mean that every cryptocurrency will survive. On the contrary, many of them will fail.
Cryptocurrency is competitive enough as it is. Regulations add another dimension of natural selection. Privacy coins must survive; without privacy, there is no freedom, and this doesn’t just apply to finance either.
Even though cryptographic protocols like HTTPS technically secure the Internet, we all know that the sites and apps we use are harvesting our data like there’s no tomorrow.
This will become an ever more potent pressure point for institutions as time goes on, and holding XMR won’t provide any protection against being booted out of the public square.
This is why the most considerable risk to crypto is a total takeover of the infrastructure it is built on. This includes not just the Internet but the devices we use to access it.
There are some disturbing developments on that front, too, but luckily, there’s still enough free market there to keep those kinds of threats for the time being.
Still, there’s no denying the growth of centralised control that we’re currently seeing worldwide.
The decentralised world of cryptocurrency is growing faster, and if it can keep up the pace, it might just manage to make the world a better place.