Bitcoin’s Role In The Recent Digital Asset Regulation
With DeFi scams and exploits increasing in the digital asset space, it is vital that comprehensive regulation that protects consumers is put in place. Although the space has been resistant to any form of central oversight, the rise in popularity of digital assets and the multitude of applications built with blockchain technology has made it necessary to provide some regulatory guidance. This is especially important to protect citizens from financial schemes that are only designed to enrich the creators and their shareholders.
Note – The original cypherpunk group who came up with many ideas around digital assets valued cryptography in order to protect themselves against authoritarian governments. This article will give an overview of Bitcoin’s role within digital asset regulation and explain why it is different from other cryptocurrencies.
This past week, Wyoming Senator Cynthia Lummis, in a bipartisan collaborative effort with New York Senator Kirsten Gillibrand, released a proposal for regulation surrounding cryptocurrencies and other digital assets. This proposal mainly addresses security and taxation laws within the United States. However, it could be used as a model for other jurisdictions if it is passed. This proposal is a good one for both cryptocurrency developers and users. It helps to ensure that the United States is a leader in digital asset innovation, while also protecting its citizens from fraudulent schemes. While the entirety of the proposal is beyond the scope of this article, the major takeaways follow, as reported in this article in Fortune:
- Digital assets, including bitcoin, are to be treated as ancillary assets, or commodities. The Commodity Futures Trading Commission will be the main regulator for digital assets, replacing the Securities and Exchange Commision.
- It clarifies the definition of a crypto broker, thus protecting developers working on Bitcoin wallets, Lighting clients, or other tools from the same reporting requirements that may be levied upon a custodial centralized exchange such as Coinbase.
- It mandates that companies raising capital from the sale of digital assets disclose those sales to the SEC.
While this bill does codify and introduce some authority and oversight to the space, it does so while ensuring that development in the space is not hindered, a concern that was previously posed by Jack Dorsey, among others. Senator Lummis, in particular, has been a strong supporter of Bitcoin and, unlike her contemporaries is focusing more on innovation than the potential downsides of its energy consumption.
Bitcoin has unique advantages that make it an asset for both regulation and user protection. First, there are no transparency and disclosure concerns regarding other base-layer platforms. This could also apply to companies that build sub assets or other products on top the Bitcoin blockchain. Second, there is no central organization that oversees Bitcoin’s operations. It is often said that bitcoin is the purest digital money, as it doesn’t offer or try to offer anything else. Holding bitcoin does not give you any special rights. You don’t have the right to vote in any entity, nor are you entitled to yield rewards. You also cannot control the underlying protocol by simply purchasing more. These features may be offered by other platforms, but this is not intended to disparage them. Many other platforms have been instrumental in helping to decentralize internet and have also allowed stablecoins to be an alternative financial instrument for those who are less fortunate. It is intended to emphasize the fact that bitcoin is the most popular form of digital currency because of its simplicity.
In a previous article, I argued that it is Bitcoin, rather than the broader cryptocurrency market, that is helping to fight authorianism and acting as a tool for financial freedom. The same argument can be used to differentiate Bitcoin when it comes down to regulation specifications for digital assets. There is no central party in Bitcoin’s vast ecosystem that can exert significant influence over its protocol. Neither can any one party create new bitcoin to satisfy a need that is not its own. The core ethos of Bitcoin is its decentralization. Many in the space believe that Bitcoin is centralized because of its supply distribution and presence of mining pools. However, measuring decentralization of any protocol, whether it is a peer-to–peer digital asset network or a local recreational league, goes beyond analyzing quantitative data like the concentrations of hash power and wealth. Perhaps the most important aspect of measuring decentralization, however, is the decision-making ability any centralized party has to make long term decisions for the protocol. Most alternative platforms, if not all of them, have some type of foundation or organization that makes significant tokenomic (the economics behind the underlying asset) decisions. Many cases have some form of governance that allows holders to vote on specific proposals. This is definitely more decentralized than the traditional Web 2.0 protocol. Let’s now look at Bitcoin’s decision-making process.
Anyone can submit a proposal to change the protocol through a Bitcoin improvement plan (BIP). The protocol-change must be approved by miners in order to be codified. Current ownership does not have any weight. The most important thing is that there is no central authority that can influence miners’ decisions. Bitcoin is more like a software than a company, unlike other platforms. (The anonymous founder/creator has been completely hidden from the public and has not made any transactions using their own bitcoin in almost a decade. )
It is specifically this decentralization that allows Bitcoin to be a tool for human rights activists and those living in authoritarian countries. This decentralization allows bitcoin to function as a version of sound currency and an active hedge against inflation. This is what regulators and lawmakers need to consider when regulating cryptocurrency-based assets. Senator Lummis and Senator Gillibrand’s proposal is a huge step in the right direction. It specifically differentiates between protocols/assets with characteristics of a traditional business and those that are independent, self-governing and helping to create legitimate social change.
This guest post is by Archie Chaudhury. These opinions are not necessarily those of BTC Inc. or Bitcoin Magazine HTML1.
I’m a journalist who specializes in investigative reporting and writing. I have written for the New York Times and other publications.