Will Cryptocurrency Regulation Stifle Innovation?

Cryptocurrency Regulation

Yes. No, and maybe seem to be the answers to this question, depending on who you talk to. With all the headline-grabbing activities of recent times, high-profile hacking attacks, ICO scams, and projects failing to deliver, cryptocurrency regulation in some shape or form would be welcome to investors.

But not the kind that stops innovation in its tracks.

And like everything in this wondrous industry that’s breaking new ground on a daily basis, there’s a very fine line to tread.

Damned If You Do, Damned If You Don’t

The US has come under a lot of fire from blockchain companies and investors alike for being ambiguous and unclear on the rules. Co-Founder of ShapeShift Jon, for example, described the situation as just too confusing:

“What are the rules because nobody knows… I think a system where there are a lot less interpretation and a lot more clarity of where the various lines are and what falls in what bucket would be extraordinarily helpful for the entire environment.”

Jon ShapeShift Co Founder

Jon ShapeShift Co-Founder

And he’s not the only one. In fact, the pressure has been mounting. The lack of clarity in the US is sending a lot of money and innovation offshore. Blockchain companies are increasingly abandoning US investors in favor of safer havens like Switzerland or Malta.

Seasoned crypto trader Ran Neu-Ner told CNBC he believed that the SEC needed to establish ICO regulations fast, or risk falling behind the rest of the world–and even worse–stifling an entire industry.

Clearly, it’s challenging for a business to operate in an environment of uncertainty. Highlighting why the majority of institutional investors are still waiting at the gates.

Malta Breaks Ground in the Cryptocurrency Regulation Race

Malta announced three new laws this month. These will regulate not only ICOs, but also DLT, exchanges and wallets, and cryptocurrency advisors. As the first country to formally establish new legislation, Malta’s breaking records across the board.

Their guidelines set expectations and give businesses a framework in which to operate. They also legitimize ICOs and blockchain technology in general.

As Steve Tendon, a key member of the Malta Blockchain Task Force said:

“They might not be correct, they might have flaws, but at least they bring clarity. And if they are not the best ones, there is always an opportunity to approve.”


Steve Tendon, Malta’s National Blockchain Task Force

Malta’s regulation so far looks to show a deep understanding of the underlying technology and the massive impact it will have on society. Not just for raising money but for reshaping entire institutions and industries. And actually, Malta’s ICO guidelines and white paper requirements are among the toughest out there. This is on purpose to weed out scams and protect investors–not to stifle regulation.

Countries like Malta showing great strides in regulation are in stark contrast to the confusion in the US or Japan. But, what about those who argue that there should be no cryptocurrency regulation at all? That excessive lawmaking at an early stage may keep the horse from getting out the stable?

Will Cryptocurrency Regulation Stifle Innovation?

Cryptocurrency regulation is in danger of stifling innovation if it’s carried out in the wrong way. Almost everyone seems to agree on that. Even Jon. He says, “The hardest thing I think, to explain about crypto and Bitcoin and all these various tokens is that some of them might fit into old categories. But a lot of them really break the old categories. To try to stuff that square peg into the round hole to try to put them into the old categories very limiting and stifling.”

He continues, “I think we need an understanding that these things are category-breaking. They may take more understanding and development before we even know what the rules should be… but in the meantime, for whatever rules they do want to apply, just make sure they’re clear.”

CEO at CrowdFundX Darren Marble, who’s marketed some of the most important Reg A+ IPOs to NASDAQ and NYSE, as well as Security Token Offerings (STOs) stands firmly on the other side as a firm believer in cryptocurrency regulation. As opposed to stifling innovation, he argues that it’s necessary for it to thrive. “People forget that at the end of the day, investors have to win,” he says.

Regulation, he states, is not there to stifle innovation but to protect investors and make sure that the scams and the bad actors go. Otherwise, investors will stop investing and the whole industry will disappear. “All that innovation disappears and blockchain becomes a footnote in history,” Marble states.

So What’s the Best Way to Go About It?

Some would say that Switzerland with its case-by-case basis and regulatory approach of principle-based law is the most pragmatic at this stage. This avoids putting things into boxes or drawing up detailed prescriptions for such a new area, essentially leaving space to see how the industry develops.

Alpine lake view in Switzerland

Alpine lake view in Switzerland

In fact, far from running away from regulation, the Swiss financial market supervisory authority FINMA was the first to release a set of clear ICO guidelines. And Switzerland is the still the largest hub for ICOs with a Crypto Valley housing some 200 blockchain companies.

Yet, the Maltese government thinks differently. In fact, Tendon and his team argue that new laws are absolutely necessary for new situations and technologies:

“What happens when something goes bad? Who is responsible? These are huge questions in my opinion and what is happening in the next regulation? These questions need new laws to be addressed. There aren’t existing laws that do,” he says.

When asked about the best way to handle regulation, ShafeShift’s Jon counters. “I myself would favor a world where there would essentially be the same attitude that many regulators in the US took towards the Internet in the early days, which was a “wait and see” approach. They didn’t know where the technology was going and if they tried to put too many rules too fast, that would stifle innovation and create all sorts of problems.

The way they treated the Internet was great and it really allowed the Internet, especially in the US, to really flourish and for all sorts of new things that nobody had thought of to develop and nobody could have predicted 20 years ago. In crypto, I think because it’s financially related or there’s value attached, it brings all the stigma with it and people want to put it in a certain box… I really feel like the best thing to do would be to let it develop because we just don’t know where these things are going.”

Final Thoughts

With so many different developments going on as much in the technology space as the regulatory one, it’s a veritable Petrie dish of experimentation. Will cryptocurrency regulation stifle innovation by putting things into the wrong boxes? Yes, no, and maybe… we’ll have to wait and see.


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Christina is a B2B writer and MBA, specializing in fintech, cybersecurity, blockchain, and other geeky areas. When she’s not at her computer, you’ll find her surfing, traveling, or relaxing with a glass of wine.