Since the Bitcoin white paper was published in 2008 and Bitcoin was launched in 2009, over 10,000 different cryptocurrencies have been created and are available for trading. It would be an understatement to say that Bitcoin, the first successful and working implementation of blockchain technology, has provided an innovative way for people to purchase things, earn and do business.
Bitcoin became a pioneer digital currency, and has paved the way for the development of a variety of digital asset products like NFTs and the creation of a trillion-dollar global market. But the road to where cryptocurrency is now has been a long and difficult one—and the journey has only just begun.
On top of highly volatile prices, the cryptocurrency market has had to constantly battle with the fact that it has been and continues to be used for scams and other fraudulent activities. And after almost a decade of passivity, the US Securities and Exchange Commission (SEC) has finally decided that these criminal acts cannot be ignored. It formed a unit focused on crypto oversight in 2017.
Since then, it has also been established that exchanges are under the regulatory umbrella of the Bank Secrecy Act (BSA), and cryptocurrencies are being monitored by the Financial Crimes Enforcement Network (FinCEN), the Internal Revenue Service (IRS) and the Commodity Futures Trading Commission (CFTC). In 2021 alone, 35 bills geared toward regulating cryptocurrency and digital assets have been introduced in the 117th Congress.
“I’m not blaming the government, like SEC, for them to act so belatedly. Because the truth is, when blockchain came out, there was so much hype or a mystic kind of feeling. It really humbled almost everyone,” esteemed intellectual property lawyer Zeming M. Gao said during a discussion with Bitcoin developer Joshua Henslee.
“I think even the top government people, they look at it and say, ‘Wait a minute, let’s not interfere too quickly because there may be something we didn’t understand.’ The truth is they were just being honest. They didn’t understand it, [so] they didn’t take action,” Gao added.
Gao is a business and tech consultant, Chief Strategy Officer at online marketplace Toolots Inc., and Chief Advisor at professional service firm Caapable.com. He also coined the term Company-as-a-Product (CaaP) and is the author of the book “Bitcoin & Beyond.”
The past months have been marked with the U.S. government enforcing crypto crackdowns, and each one is faster and bigger than before. In July, crypto exchange Kraken, which is valued at $11 billion dollars, was revealed to be under investigation by the Treasury Department after it allegedly disregarded U.S. sanctions against Iran.
On August 1, SEC labeled smart contract-based crypto earnings program Forsage as a Ponzi scheme, charging 11 people in the process. Ethereum-based coin mixing service Tornado Cash was also sanctioned by the U.S. Department of Treasury last month over money laundering.
The sanction is a ban on all Americans interacting with the Tornado Cash platform. However, many are questioning whether or not this sanction would be debilitating because the anonymous nature of transactions–no one can verify where or who are sending them–was what made Tornado Cash popular. No matter the effectiveness of the sanctions, these crackdowns act as a clear warning to crypto platforms to get their act straight or they may be the next ones to be targeted.
But what is next after these crackdowns? Although stricter cryptocurrency and blockchain legislation are sure to follow, it would be better if policymakers and regulators make it a part of their duties to learn more about these technologies.
“I hope the government would actually study from this point, instead of just focusing on [crackdowns]. I personally don’t believe that cracking down is the primary solution. It’s sometimes necessary, [but] I don’t think it’s the primary solution. The primary solution really is [making] sure the right narrative is being promoted, then people have the right access to the right kind of information,” Gao pointed out.
“I think to have a firm footing to make decisions like these, you need to have a thorough understanding that you have a better alternative. When you don’t have a better alternative, then it’s very hard—almost reckless—to make a decision like this,” Gao added.
The Better Alternative
Gao is actually talking about the ability of a public blockchain to scale as the better alternative. Compared to cryptocurrency working as a speculative investment used primarily for trading, it is better to focus on blockchain as a technology that can not only make cryptos more stable in price and value, but also provide a variety of uses for businesses across all industries—just like how the Internet did.
Scaling is key because it enables the constant increase of block sizes and transaction capacity, reducing fees in the process. Combined with a public blockchain that provides immutability, security and transparency, scalability brings power, efficiency and practicality into the technology.
The opposite of this is what happened to cryptocurrency lending platform Celsius Network. On July 13, Celsius filed for Chapter 11 bankruptcy after freezing withdrawals in an effort to keep the company afloat. Now, about 1.7 million people have lost their hard-earned savings with the fall of Celsius because it could not handle extreme market conditions.
“The trouble is actually this, it’s not that they can’t do it now, it’s that they actually have a theoretical hard ceiling…. It’s not purely a technological problem, it’s an architectural problem,” Gao commented.
“You mentioned that it’s not just a technological issue [but] architectural. I also think there is economics there. You need the fees to be—humans cannot comprehend how low the fee needs to be for that to be possible…. Even today, Bitcoin SV on that front is superior to any other payment system already. And I think the fees are still too high. So, I think that part is a big factor as well,” Henslee added.
Because platforms such as Celsius cannot scale, instead of revenues relying on transaction volume, they are heavily dependent on the price of cryptocurrencies that are highly volatile. Hence, when there are extreme market changes, such as prices falling over 50% this year, they end up not being able to handle it and declaring bankruptcy.