Crypto: Regulation Perspectives 2022

2021 was a Defining Year for Cryptocurrencies Adoption

2021 will be remembered as a defining year in the evolution of cryptocurrencies since the creation of Bitcoin in 2008. Cryptos in general have become mainstream while revealing their bright and dark sides.

The Bright Side of Crypto

On the shining side, crypto (used here as an umbrella term) became a thing. It was one of the phenomenons most talked about in the media. Its adoption soared globally to more than 800 % compared to the year 2020.

The crypto industry as a whole broke new grounds with a market cap of $3 trillion. On 10th November 2021, the bull market led Bitcoin (BTC) to reach an all-time high close to $70,000?after starting the year under $30,000.

In major research published in October 2021, the Bank of America (BOA) headlined the now-famous statement "Cryptocurrency has become too large to ignore".

In the US, the Securities and Exchange Commission (SEC) approved the first bitcoin Futures ETF of the country.

In Thailand, the SEC which is the regulatory body with oversight on the buoyant crypto industry has licensed 13 exchanges. The bold move of the very traditional Siam Commercial Bank (SCB) acquiring 51% of the shares of Bitub, the leading crypto exchange of the Kingdom has taken everyone by surprise and added to the excitement in the crypto space.

BTC, the apex of crypto was not the only one to shine in 2021. Other digital assets such as Ethereum (ETH), a multipurpose platform that can process any type of transaction was up 443%, closely followed by other competitors such as Solana (SOL), Polkadot (DOT) as well as other Decentralized Finance (DeFi) tokens and gaming tokens such as Axie Infiniti (AXS).

The historical adoption of Bitcoin as legal tender alongside the USD, by El Salvador, in September 2021, marked a turning point in monetary and financial policy-making by State-Nations. This move may suggest that like-minded leaders may emulate President Nayid Bukele in the near future.

Around the world, a new phenomenon referred to as Non-Fungible Token (NFT) appeared to attract interest and gain traction on traditional auction houses such as Sotheby's with a feverish embrace that is creating a new market of hundreds of million-dollar values.

Last, but not least, the founder of Facebook has literally opened a Pandora's box with the Metaverse by unveiling the new direction of the company and rebranding Facebook as "Meta".

The Dark Side of Crypto

There is no doubt that the crypto "revolution" brings many benefits, such as making possible easier and faster transactions, reducing fees, and creating the potential for improving financial inclusion as well as allowing the creation of a new digital asset class.

On the dark side, cryptocurrencies gained a reputation for facilitating criminal activities. As a matter of fact, Crypto-based crimes reached a staggering number of $14 billion in 2021 with three types of illicit activities: stolen funds, scams, and money laundering.

Another controversy started at the beginning of February 2021, when the CEO of Tesla, Elon Musk jumped into the crypto fray by buying?$1.5 billion in Bitcoin and announced that going forward he would accept cryptocurrency as payment.

But just three months later Elon Musk, also known as "Doge Father", backtracked from accepting BTC with a shocking public announcement that he was concerned about the increasing use of fossil fuel for BTC mining! The turnaround created major turbulence in the crypto market and BTC and Doge crashed.

To be fair, it was estimated that the yearly energy consumption of Bitcoin miners, is approximately the same amount of energy used by nations such as Argentina, Colombia, Norway, Sweden, and Ukraine in a given year. In other words, Bitcoin’s significant carbon footprint is a matter of corporate social responsibility and accountability.

The Change of Heart of the Banking and Financial Sector in 2021

As the story goes, at the World Economic Forum in 2014, the banking and financial industry led by JP Morgan's Chief Executive tried to discredit cryptocurrencies in general and called Bitcoin, in particular, a "terrible store of value that was also used for illicit purposes". Ironically, after trying to "kill" Bitcoin and failing, the same banking and financial professionals have started to embrace cryptocurrencies massively in 2021.

2022 Will Be a Defining Year For Crypto Regulation

The year 2021 exposed the unpreparedness of regulators to address the legal issues posed by the growing adoption of cryptocurrencies, in the context of a crackdown against the actors of the crypto space, forcing large crypto exchanges such as Binance to use sophisticated legal strategies and loopholes of international law to pursue their business.

The law has not kept pace with technology, the disconnect has caused unease followed by defensive moves from lawmakers of many countries.

The sentiment in communities around the world is that crypto was under attack by uninformed regulators trying to protect the legacy system by engaging in a "war".

The crypto regulation front in 2021 has revealed different facets of lawmakers and regulators around the world. Most of them were incapable of grasping the essence of crypto as a new digital asset class enabled by Blockchain technology.

A Comparision With the Regulation of the Internet and E-Commerce

A parallel can be drawn with the early days of the?Internet when the network was primarily a tool for government, military, and academia prior to the 1990s.

In the beginning, regulation was not an issue because the use cases were simple. All needed were protocols for basic requirements for access or restrictions of access. Later, the?World Wide Web and?the Internet?opened a new era of commercial activities in cyberspace. As a result, all kinds of legal issues and conflicts emerged, compelling policy-makers, lawmakers, and regulators to consult with businesses, industry groups, legislators, governments, and Think Tanks.

Back then, while unleashing creativity and empowering productivity, the Internet also allowed new opportunities for illegitimate activities, such as the invasion of privacy and theft.

Other legal concerns were related to contracts, transactions, and trade. As a result, there were increasing calls for regulation to sort out the various challenges and, in a sense, free the Internet from ambiguity, starting with defining how Domain Names and IP numbers were assigned.

Everyone agreed that the Internet needed to be regulated but it remained to be seen how a network of computers and data exchanges could be regulated without centralization.

The Internet Governance

A retrospective look at the creation of norms, rules, and standards for the Internet and E-commerce would not have been complete without a word on its regulatory authority, the Internet Corporation for Assigned Names and Numbers (ICANN).

There were a number of problems to resolve for Cyberspace to exist. How to reach another person on the Internet? What organization shall have the global responsibility to assign computer address numbers, to allow computers to communicate? How to define, design allocate, and manage domain names? Without answers to these questions, a global Internet would have been impossible. Therefore coordination and consensus for rules and standards were necessary.

Following a January 1998 "Proposal to Improve the Technical Management of Internet Names and Addresses" (Green Book), ICANN came into being in September 1998. The organization was established as a nonprofit public benefit corporation "organized under the California Non-profit Public Benefit Corporation Law for charitable and public purposes".

Its main mandate?was to keep the Internet secure, stable, interoperable, and develop policy on the Internet, establishing a domain name system (DNS), and facilitating alternative dispute resolution through its Uniform Domain Name Dispute Resolution Policy.

The only caveat persisting until today is the fact the ICANN was incorporated in the US (California) and is historically linked to the US Military and Intelligence departments. The close connection with US Government agencies is a cause of mistrust on the independence and impartiality of ICANN.

Many countries especially in the EU, the Middle East, and Asia have voiced their concern and called for the supervision of ICANN by the United Nations or under an international treaty organization, for a truly secure, transparent, and accountable regulator of the global Internet.

The Internet Era Law-Making and Regulation By Consensus

The first E-commerce laws and regulations were issued in late 1997 and early 2000s.

There was a clear consensus that the emergence of the Internet as a mass-media phenomenon with a growing number of commercial use-cases, proved that it was there to stay. The overall benefits of speed, efficiency, and communication were undeniable. They have become indispensable for transactions, services industries, international trade, and new forms of property and value creation.

It seems that history is repeating itself. The regulation of?the Internet?was a contentious issue, just like the regulation of cryptocurrencies is creating so much controversy.

In the interest of historical reference, the legal issues that needed to be addressed for clarity in cyberspace were: the qualification and legality of "writing", access to the system of data exchange, the attribution of a message to the sender, the integrity of an electronic message, the contract formation, cybercrime, etc.

Cyber Sapiens, Crypto Sapiens and Meta Sapiens

It is quite a surprise that the same consensus that prevailed in the world during the Internet and E-commerce regulation initiatives is not (yet) happening for the regulation of cryptocurrencies, 30 years later.

Were the "Cyber sapiens" smarter than the "Crypto sapiens" when it comes to regulating technology paradigm shifts? If this is a regression, how will the "Meta sapiens" fare in regulating the Metaverse?

Indeed, the expressions that the regulators of the crypto space are showing are not glorious. What transpires is panic, authoritarianism, regulation by enforcement, regulation by extorsion, opportunism, regulation by reaction, protecting the legacy system, conflicts of interest, and regulation by ignorance.

Whether they like it or not, prepared or not, in 2022 regulation will be inevitable and regulators will be forced to be smarter, more thoughtful, and constructive.

More than ever there will be a need for educated, visionary, and forward-thinking regulators to create clarity and guidance for the crypto space.

Besides the need to define what kinds of digital assets are securities, the market players will be concerned with digital assets risks management, intellectual property-related aspects of NFTs (ownership), issuance of wills, submitting evidence on the blockchain, and preparing to regulate the "Metaverse".

The US SEC vs. Ripple/XRP lawsuit will end in 2022. Although it is a domestic legal case playing out within the jurisdiction of the US, this case will create a precedent beyond the US have serious implications for the global crypto market.

As pointed by Jeremy Hogan in his famous "Legal Briefs", it is a battle between a regulatory agency (SEC) doing everything to preserve its power and control and entrepreneurs (Ripple) trying to use the advance of new technology to create a new industry, with retail investors caught in the middle.

Most probably 2022 will also open the floodgates of crypto litigations, create "legal headaches" and raise the issue of access to justice, as anticipated by the former CEO of Twitter, Jacques Dorsey.

Cryptocurrencies and Alternative Dispute Resolution (Arbitration - Mediation)

My personal view about this initiative appears to be a noble cause, is that it is a missed opportunity. Instead of creating a fund for frivolous and expensive litigation support, it would have been better and more suitable to the spirit of the crypto revolution, to establish a framework for a Global Alternative Dispute Resolution such as "Cryptoarbitration", or "Cryptomediation" where actors of the industry and members of the community can explore amicable settlement.

Conclusion

Let me conclude on the complex, albeit inevitable, and fascinating topic of crypto regulation in 2022, by sharing the excellent article published by Cointelegraph.

The paper raises the main issues to be addressed by crypto regulation, by asking various experts from the crypto and blockchain industry: "In your opinion, has the crypto space reached any milestone in 2021in terms of regulation? And what do you expect from regulators in 2022?".

#Disclaimer: Cryptology is a personal blog meant purely for an academic and educational discussion on the legal and regulatory implications of the crypto industry and digital assets business. It contains general information. It is not legal advice and shall not be construed as such. All views shared in Cryptolawgy are strictly personal and do not concern any entity, organization, or client, that I am or may be connected to, directly or indirectly.