One of the biggest draws of cryptocurrencies like Bitcoin is the anonymity and freedom they offer as a byproduct of its decentralized and highly-secure nature. No single entity or organization has control over the currency and connected network. Instead, it’s growth, value and use are all controlled, regulated and facilitated by the market — and by proxy those who participate in the said market.
It has run this way since the inception of the technology — 2007 when Bitcoin was born — and everything from Ethereum to Monero relies on the decentralized structure.
That makes it a bit disarming to hear mumblings about official regulation, similar to what’s available for fiat currencies. Japan’s Financial Services Agency, for example, announced plans to regulate crypto trading by placing a cap on margin trading specifically. Of course, as far as regulation goes, that represents only the tip of the iceberg.
The Securities and Exchange Commission, or SEC, back in the U.S. also considered regulation for Ethereum, the blockchain powering Ether — a cryptocurrency similar to Bitcoin. But they eventually came to the conclusion that Ether is not a security, putting it out of the purview of the SEC. The ruling lowered a lot of tension that had built up within the crypto community about regulations and restrictive policies. But it doesn’t necessarily mean they won’t ever happen, which is important to understand.
Back in Japan, the FSA watchdog wants to take their regulation a step further, by controlling crypto wallets. Well beyond the privacy concerns and potential breach of personal rights’ it’s entirely possible this will result in an absolute mess. The nature of crypto technologies — including wallets — make it near impossible to regulate in the way FSA wants.
Right now, the regulations are purported to apply only to “custodial wallets,” owned, maintained and controlled by third-parties, namely crypto exchange entities. As a whole, it’s a move to prevent money laundering and terrorist operations. Software and hardware wallets — largely owned by private parties — will not be affected by the FSA’s new regulations. However, there is no guarantee that the group won’t focus their efforts elsewhere. This is the exact thing crypto-platforms were created to avoid in the first place.
Would Wallet Regulation work?
The question then becomes, would the kind of regulations FSA proposes even work on a large scale?
One of the primary aspects of the regulation involves FSA wanting to identify parties involved in various transactions to rule out illegal and illicit activities. This would mean requesting some sort of identification as a requirement from users wishing to make a transaction. According to the watchdog, on paper, it seems this would only affect “third-parties” and exchange companies, but there’s no way to know it wouldn’t also affect anyone doing business with said organizations.
But crypto wallets are self-operated, self-owned and self-regulated. A single user does not require third-party custodianship to use, maintain or protect their digital assets. You don’t hand over crypto values to a bank or entity for storage and protection. Instead, you retain access to the wallet and digital assets as proof of full-ownership.
This means anyone within the blanket of FSAs regulation could easily retain their crypto balance and trade or exchange it with entities that fall outside said requirements. To put it simply, a Japan-based crypto user could activate a VPN to download their wallet from outside the region and also to do business with entities outside of it, as well.
The regulation only works if the crypto users who it’s meant to protect want it to work, and want to rely on it. They have full control, which means they could bypass the regulations altogether.
To make matters worse, regulatory bodies can’t tell whether the crypto user behind a wallet is an organization or an individual. Thanks to the anonymity there’s no way of knowing who that owner is, outside of them coming forward and revealing their identity.
55% of the world’s most valuable Bitcoin is held in just 1% of all wallets. And we still have no idea whether or not many of those wallets are in use — if you lose your key you lose all your crypto stored within the wallet. If we can’t discern the difference between an active wallet, a lost wallet and one awaiting further investments how could we regulate the users behind them?
As a result, it seems silly for such a regulation to exist. There are many ways around it, most of which will likely be utilized by large exchange organizations and private crypto users alike. That’s the beauty of cryptocurrency and blockchain technologies. Regulation and restrictive laws can apply, but they probably won’t work out.
About the author: Kayla Matthews is a tech writer from Pittsburgh whose work has been featured in crypto outlets such as Cointelegraph, Bitcoin Magazine and Information Age. She’s also been a frequent writer for The Next Web as well as other technology publications. To see more of her work, you can visit Productivity Bytes or follow her on Twitter.
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