Regulate or Die: A Lawyer's Perspective on Crypto

Australian lawyer Jamie Nuich argues why we need better crypto regulations.

During the Siege of Melos in 416 BC, the Athenians took the state of Melos, killed all the Melian soldiers and sold the women and children as slaves. The Melians preached the need for peaceful coexistence, to which the Athenian said: we will take your state because we are stronger and we can.  

At the time, Thucydides, the brilliant historian and father of game theory, famously warned us that:

“…right … is only in question between equals in power, while the strong do what they can and the weak suffer what they must.”  

Thucydides

While regulations and laws can seem trite and political, the underlying legal principles play an integral role in regulating interactions and maintaining a level playing field for all participants. Otherwise, we see the kinds of unfair zero-sum games like what played out with the Siege of Melos.  

If crypto is allowed to exist without the rule of law and the right legal principles, we will be left to govern our legal relationships with pragmatic realism and the harsh rules of game theory, where justice and morality are treated as expendable afterthoughts.

Laws act like invisible force fields against such wrongdoing. In securities and competition laws, for instance, the law deters bad actors, protects investors, and gives government authorities supervisory powers, as a kind of “referee” to keep the score and call foul when needed.

Crypto regulations increase mainstream adoption

Improved regulations would increase market confidence, leading to mainstream adoption. 

The fact is there are many interested investors and enterprise decision-makers on the outside of crypto waiting for their government’s approval to use crypto in lieu of fiat currencies. But if governments do not give these outsiders the green light and legal frameworks, then they may never enter crypto, hence the primary urgency to create better regulation and open the gates to greater, mainstream crypto adoption.

In the absence of further regulations, government seizures, suits and enforcement actions have been the alternative tools by which authorities have regulated crypto. However, enforcement cases can stigmatize crypto, decreasing market confidence even more, rather than ensuring crypto has the legal foundations it needs to grow.  Written laws and regulations could solve this problem. 

Giving crypto a sense of legitimacy

Improved regulations are essential to give crypto a sense of legitimacy. Vitalk Buterin wrote last year: “the most important scarce resource is legitimacy.” 

Regulations are only “legitimacy signals” for crypto. However, these legitimacy signals will still most likely be the greatest catalyst for mainstream adoption in democratic states.

More and better regulations would also allow crypto users to better claim and defend crypto assets and rights with the approvals and lawful powers of local laws, courts, and state agencies, thus increasing the verified legitimacy of crypto. Decentralized rules in crypto will never give you this.

Proliferation of cryptocurrencies

With the proliferation of currencies, better crypto regulations are more important than ever. There are now over 10,000 cryptocurrencies in circulation, nearly a 30% increase from November 2021. These numbers are out of control, especially if enough tokens lack utility or merit beyond hype. 

Regulation could stop the unchecked growth of plainly dodgy cryptos so the crypto market is not flooded with valueless currencies. 

Stablecoins

One area where a lack of regulations rightly affects the market’s confidence is with stablecoins, where there are known problems with reserves. 

In 2021, Tether was fined $41 million for misinforming the public about its reserves. If any stablecoin like USDT fails to keep reserves, and enough investors cash in simultaneously, it could crash the crypto markets. No matter what, stablecoin regulations are a must to ensure that crypto markets are not set up to fail. 

What happens if there are no crypto regulations?

A lack of appropriate laws and regulations affects crypto in the form of scams, Ponzi schemes, rug pulls (the DAO attack), market manipulation, pump and dumps, especially by whales,  enterprise melt ups, insider trading, and so on. 

If the rule of law does not prevail in crypto, then states would be signaling to crypto users that they are no better off than the Melians at the Siege of Melos, and may as well take matters into their own hands to protect their interests.Regulation is needed to ensure adequate checks on centralized authorities that operate or engage with crypto. 

Before crypto, centralized entities held responsibilities and obligations (with fiduciary duties, financial reporting, and corporate governance requirements, for instance). The rationale was to limit abuses of power and mitigate the risks inherent in the centralization of power.  

But crypto, and DeFi especially, are largely unchecked playing fields. In theory, there is a window for centralized powers to operate within crypto and DeFi without appropriate checks and balances. Those entities might be governed under old paradigms, but those old checks and balances were not made to cover new risk profiles within crypto.  

In the worst case, centralized entities in crypto might even grow to exercise more power than states.

Without appropriate regulation, corporations, VCs, and their legal partners might simply colonize crypto ecosystems without checks and balances, to a point where they grow to wield more power than governments, without having to answer to anyone. By then, we will have well and truly passed from any remaining pretense of democracy into full-blown techno feudalism. 

Crypto desperately needs the right regulations to stop irreversible scenarios like that playing out in the future.

Final Thoughts

Crypto regulations might seem like a chore for crypto investors. But we need them. Not only to drive mainstream adoption, but also to foster the right legal environments for crypto to flourish, and for the rule of law to prevail – as much within crypto as it would within an ideal, democratic state.