Cryptocurrency Regulation Hurdles: Citizen Protection or DeFi Sabotage?

Data & Research / 24.05.2020

Are governments keen to regulate cryptocurrencies to prevent financial fraud and protect citizens, or are they using regulation to Stifle Decentralized Finance?

What Was TON And Why It Is Over” is the title that was given to the parting statement made by Telegram’s co-founder after Telegram was recently forced to abandon the TON blockchain project.

After a continuous legal battle with the US Securities Exchange Commission (SEC), this ensued, which accused Telegram of conducting an illegal ICO sale and issuing unregistered Gram tokens in 2018.

Since then, the US SEC has stopped the platform’s launch twice and has finally succeeded in forcing Telegram to concede defeat in 2020. Even after Telegram tried to delay the project’s launch until 2021, it even launched it as an independent company.

TON is just one of many blockchain/crypto projects that have battled extensively with the SEC, some winning and others losing. Other blockchains and crypto startups worldwide have also had their day with financial regulatory bodies and government agencies in Europe and Asia.

The SEC, however, is by far the most vigilant by the number of convictions and, for instance, stopping Telegram to launch TON, not only in the USA but anywhere in the world.

The Rise and Abuse of ICOs

While the US is home to most of the cryptocurrency startups globally, it has also been responsible for choking out others out of business. Some startups have had to relocate abroad where crypto startup regulation is much more specific and accommodative.

Initial Coin Offerings (ICOs) gave rise to a new way of funding blockchain and cryptocurrency projects, especially after the launch of Ethereum and the rise of smart contracts in 2015. Like public companies offering initial public offerings, ICOs enabled blockchain developers to raise capital for their projects by selling their ecosystem tokens.

The simplicity of buying such tokens resulted in an ICO boom, and by 2018, hundreds of projects were raising over $50million in the capital. The US SEC started warning investors to beware of ICO scams, and other countries like China started to ban ICOs. The EU was particularly against ICOs due to their ignorance of KYC/AML regulations, making them an attractive nest for financial fraudsters.

Some of the most successful blockchain projects today started from ICOs, including Ethereum, NXT, IOTA, NEO, Spectrecoin, Ark, Stratis, and QTUM.

SEC Starts to Crackdown on ICOS

In 2018, a report by an ICO advisory firm, Satis Group, gave a shocking breakdown of ICOs’ success rate, showing that only about 8% made it to exchanges. The rest were either outright scams, failed projects, delayed, or had no value on exchanges.

In another report, Bitcoin.com stated that 46% of all ICOs conducted in 2017 failed by the first quarter of 2018, calling this a digital graveyard of broken promises. TON was one of the earliest projects to raise a high capital of $1.7B.

The US SEC announced its first investigation into digital assets on July 25, 2017, when it declared DAO Tokens as securities. This marked the first serious scrutiny to determine how US security Laws would apply to virtual organizations’ offers, sales, and trading of interests.

Today, DAO, which was one of the most successful blockchain projects, serves as a memory and a lesson of how hackers and government regulation can both stifle a revolutionary innovation into the ground.

Is There More To Government Opposition To Cryptocurrencies Other That Citizen Protection?

In Telegram’s case, Pavlov and his brother protected the messaging app with such effective end-to-end encryption with a lifetime guarantee to its users that it will never be for sale. Its high-security level makes it hard for governments to track citizens’ activities, including in places like Iran, where more than 40% of Iranians use Telegram.

Similarly, Facebook, which has over 1 billion users as the biggest social platforms’ enterprise globally, has had issues launching its crypto project – Libra. Various authorities in the US have raised concerns over Libra’s effect on the US dollar.

The launch, which was initially scheduled for the first quarter of 2020, has been delayed by multiple congressional hearings. Unlike TON, which is now starting from scratch as an independent project, Libra’s fate still hangs in the balance.

In March 2020, a Russian official’s digital assets bill hinted that it might include a ban on all issuance or sale of cryptocurrencies in the country. The official stated that cryptocurrency technology threatens financial stability, consumer protection, and the prevention of money laundering activities.

There is no refuting that around $9million gets lost to cryptocurrency scams almost every day. Still, authorities have been accused of undermining cryptocurrency rather than work to accommodate it with sufficient regulation. 

Even today, the US SEC has remained mostly reactive, waiting for projects to launch and sue, rather than helping entrepreneurs with clear guidelines so that they can avoid hurdles later after projects have been launched.

For instance, two years down the line, a closer look at SEC guidelines to ICOS and securities still gives a vague guideline that might make investors afraid of falling into the same trap as their predecessors.

Is Cryptocurrency A Threat To Centralized Governance?

Blockchain technology’s decentralized core infrastructure bypasses superior government authority and monetary control over its citizens and sanctioned countries like North Korea. This makes decentralized finance such a complete disruption of world powers by giving individual citizens an equal opportunity to govern their own wealth anywhere globally, without reliance on government policies.

While the cryptocurrency market is highly volatile and based on a complex system that is hard to understand, the fiat money policy has twice plunged the world into financial crises that can be directly blamed on governments. Consequently, the current financial system cannot reach the most unbanked populations that cryptocurrency is successfully accommodating.

Conclusion

Cryptocurrency technology is here to stay. Instead of governments trying to use existing policies to control decentralized finance, they should instead develop a proper legal framework to accommodate massive crypto adoption.

After realizing the setbacks of centralization in the financial industry, Carol has dedicated her career to apprise everyone on the benefits of blockchain technology. When she is not writing, she’s probably somewhere in the park reading a book.