Regulation around these two issues will shape the crypto industry’s future

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Cryptocurrencies come and go, and DeFi projects rise and fall, but regulation will leave a permanent mark on the crypto industry. And it’s coming. Everyone can feel it. Governments worldwide are working around the clock to understand this complex subject and get their laws in order. However, only a few people know for sure how close they are to achieving their goals.

Logically, the industry’s eyes are on U.S. regulator, where a high percentage of crypto companies are registered, and it’s widely accepted that most of the world will follow the US model. That leaves the field wide open for smaller countries like El Salvador to pick up the ball and run with it. The opportunity is just too great for everyone to sit this one out.  

That’s why Smartblocks breaks down two of the main regulation-related issues we anticipate will shape crypto markets over the next hundred years. These two are playing out as we speak. And the jury’s still out on both. Nobody knows for sure where the chips will fall.

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Regulation and the possible proof-of work ban

In May 2021, China outright banned proof-of work mining. Today, the country is still responsible for 22% of the hashrate, according to the Cambridge Centre for Alternative Finance. That means, China is the second country with the most bitcoin mining in the world. Even if at its highs China controlled 70% of bitcoin mining, it’s safe to say that the ban didn’t work out as expected.

Not only that, the bitcoin network quickly recovered, and then its hashrate rose to new all-time highs. Today, the bitcoin network is more powerful and secure than it was when China banned mining. And that happened in a depressed market. There has been no bitcoin euphoria for a while now. In any case, there are fears of a complete ban on proof-of-work in the US at the federal level. Is the US crazy enough to follow China’s lead? 

Earlier this year, New York banned cryptocurrency mining using conventional energy sources.  Which is ironic, given New York Major Eric Adams got elected on a bitcoin platform. He even got his first three paychecks in bitcoin as a PR stunt. Once Adams was in office, though, he stopped talking about the subject. And when people in his state got the proof-of-work ban proposition running, Major Eric Adams was forced to say the hilarious quote: “I support cryptocurrency, not crypto mining.”

The fact of the matter is, banning proof of work in New York will hurt the state tremendously. Plus, the ban doesn’t recognize the dynamics at play here. It’s as the Blockchain Association puts it: “the ban will have zero impact on the climate, however, as the mining operations will simply move to neighboring states.”

Another funny thing is that in the US, bitcoin is criticized because it doesn’t use enough sustainable energy. In Europe, however, it’s the complete opposite. In the words of Erik Thedéen, deputy chair of the European Securities and Markets Authority, “Bitcoin is now a national issue for Sweden because of the amount of renewable energy devoted to mining. It would be an irony if the wind power generated on Sweden’s long coastline would be devoted to Bitcoin mining.”

So yeah, there’s nothing bitcoin can do to win this battle in its enemies’ eyes. Nevertheless, it has to fight the battle. As long as a percentage of the people think that proof of work mining is bad for the environment, bitcoin will have to fight that battle.

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Regulation and the Tornado Cash situation 

Weeks ago, the U.S. Office of Foreign Assets Control raised eyebrows by placing the mixing service “Tornado Cash” on its sanctions list. The service lets you obfuscate your coin’s history by mixing it with the coins from other people participating in the service. For governments, it’s a dangerous weapon that has been used by money launderers everywhere. For Ethereum users, Tornado Cash is an essential privacy tool. And privacy is a human right.

Mind you that Tornado Cash is not an entity, nor a company, nor a subject. It’s an Ethereum-based smart contract. It’s code, and everybody knows code is speech. It’s a technology, a tool, which admittedly can be used for nefarious purposes. The thing is, there’s a legitimate case for the legal use of Tornado Cash. And in this case, all of its legitimate users got sentenced, along with the bad actors.

Developers were impacted as well. In the Netherlands, they arrested a suspected Tornado Cash developer. Is it a crime to write code now? Are programmers responsible for what people do with their code? In a strongly worded blog post, the Electronic Frontier Foundation summarized the world’s fears around this issue: “Regardless of how one feels about cryptocurrency, mixers, or the blockchain, it’s critical that we ensure the ongoing protection of the development and publication of computer software, especially open source computer software.”

Weeks later, the US Department of the Treasury answered a few questions about the Tornado Cash sanctions. In an uncommon move, they backtracked a little bit. Among other things, they said: “U.S. persons would not be prohibited by U.S. sanctions regulations from copying the open-source code and making it available online for others to view, as well as discussing, teaching about, or including open-source code in written publications, such as textbooks, absent additional facts.”

The world needs clarity around the Tornado Cash situation because this is potentially a landmark case. It will set a precedent. It will establish the rules for the next few years for smart contracts and Ethereum.

There you have it, folk. Two regulations that could directly impact your investments, for better or worse. Regulations are one of those subjects in which information asymmetry is minimal. That means, everyone basically gets the news at the same time. For that alone, wise investors should set up alerts about all kind of regulation news. Those will definitely play a big part in the future of cryptocurrencies.