How to regulate cryptocurrency?
Human Nature
Bitcoin and Blockchain technology made us realise that we don’t need a trusted third party (a bank) in between financial transactions. Since transactions are stored in the blockchain, which cannot be tempered with, we solved the problem.
It is in the nature of mankind to seek for loopholes. A dutch proverb said “The most beautiful flowers bloom at the edge of the ravine.” Driven by money, some of us look for, and find the opportunity to swindle. And so we are confronted with hacks on exchanges and non-existing projects running an ICO, harming many honest investors and believers.
In a few years the costs of initiating an ico rose to enormous levels, making an innovative use of blockchain and cryptocurrency a game for the few.
Rules
I tend to see rules as well-meant advice. But to be able to keep on using cryptocurrency, or to finance a good business idea or project with a token crowdfund, we do to agree on a set of basic rules.
It is almost ironic to conclude that the way we handle our acquired ‘freedom from traditional banking’ leads to the statement that we can’t handle that freedom.
On the other hand we see traditional legislators wrestle to get a grip on recent events. Do we ban bitcoin, forbid coin offerings or whatever. Some see the future, some are afraid of it. In between bans, rumours of legislation and all opinions around it, we have to find our way.
I can’t help but wondering: If we are able to create a system that records every transaction to create transparency, why aren’t we able to self regulate the structures we invented?
Compare
I think both traditional banking as well as Crypto banking has the same challenges. We need to take care of issues like money laundering, anti-terrorism, and so on. We really need to know our customer, both investors in tokens, but also the token issuers.
In an Initial Public Offering [“IPO”], where a company goes public, the company is accompanied by investment banks, lawyers, accountants. They all do their due diligence and work on the prospectus, so the potential investor is properly informed. Before the prospectus is made available, contracts are in place to list the stocks on one or more exchanges. In short: everything is taken care of.
When going public, all those bankers, advisers, accountants and the exchanges must be licensed and have a strict set of regulations to keep up with. A company steps into a regulated environment where is has to follow the rules or suffer the consequences.
We took some shortcuts in our process to issue tokens. Sure, most hire a lawyer, take care of legal issues like domicile, write a whitepaper and work hard on the offered project. I know I am putting it rather blunt, it is not my intention to discredit anyone. But what I am trying to say is that the process is shaky.
The way we are conducting coin offerings or start exchanges to trade cryptocurrencies and tokens are the other way around. There are no regulations (or in any case it’s uncertain). If current regulations apply, every entity that issue a coin or token will have to apply to a complete set of rules.
The costs of an IPO are extreme. It is not possible for smaller companies or startups to use the equity market to fund their (potentially) great businesses. I strongly believe that an ICO can be a serious alternative for not only startups or projects, but also for company listings.
Meanwhile, costs for issuing tokens rose to astonishing levels, most of it for marketing. In our enthusiasm to convince the investor to choose our coins we invented pre ico’s and private pre sales to fund our funding. I wonder if the money spend improves the quality of the fundraising (informing the investor properly).
Regulating
Why don’t we keep what is good and change what needs to be changed? We discovered and developed a great system that solves many problems, but now we need to make appointments with each other to use our “gained freedom” wisely.
In the Netherlands we had a lot of discussion about franchising. Basically, the law was outdated and a lot of lawsuits followed each other. Time was spend to write a code of conduct. The Minister of Economic Affairs then stated that both franchisors and franchisees could work according this code voluntarily, but it would be transferred into law if that did not work. I do not know if this is a known conduct in other countries, but it could be a way of thinking.
At this moment, every country worldwide has his own thoughts and handles accordingly. It makes a global approach impossible and raises the question if excesses could be banned, or that we shift into a grey area.
What if we do it ourselves?
If we are bright enough to develop blockchain and cryptocurrency, we should be able to make appointments how to use it. I think it can be maintained using blockchain. Basically we laid the foundation for the solution ourselves.
We can agree, for example, that you can only issue an initial coin offering when there is prove of a solid due diligence and an exchange has been contracted, based on that prove. I think that it lowers the risk for a scam. When this due diligence is stated in a form that it can be used for the financial and risks paragraphs of the whitepaper, maybe we can come to documentation that is close to prospectus regulations. Coöperating with the exchanges allows the issuer to do a proper “know your customer” proces. Issued tokens can be traded immediately.
When exchanges are regulated or behave according the compliance and risk rules set by securities laws, we prevent each and every company to deal with those laws. Investors know that tokens traded by regulated exchanges are from a certain quality and the exchange has done what is in its reach.
What I am looking for is how to regulate without having the burden of enormous obligations that killes the market. Governments tend to overkill. It is my believe we have to self regulate.
Costs
We have to avoid that issuing tokens is made impossible for honest entrepreneurs and hardworking teams. At this moment, I think we almost achieved that. Maybe we can stop with actions like airdrops or unreal discounts on token prices. It is only short term thinking that is not helping us establishing a solid system.
Maybe naïve, but when we select at the gate by demanding a due diligence and contract with at least one exchange, investors have less choice which leads to lower marketing costs. If this is not the case, we at least protect our potential investor to put his money in a scam, raising your chance to issue a successful token.
Conclusion
Although we are inventors, entrepreneurs or investors around the globe, we are bound by a chain. I am sure Satoshi Nakamoto didn’t have chaos in mind. We have proven that we can work out a system that in itself gives an honest view on transactions. Let us as a community work out ways to self regulate. It takes discipline but makes us stronger.
