Future adoption depends on a number of uncertain factors, of which the potential impact of regulation is one of the most important. So what exactly are the crypto risks of regulation and how much have they increased due to the failure of bear markets like Earth/Moon? Learn Crypto breaks it down into clear themes.
- Environmental foundations for regulating cryptocurrencies
- Regulating the nature of cryptocurrency
- Joe Biden’s attempt to master the regulation of digital assets
- Regulation of exchanges, non-hosted wallets and stable coins
Crypto and the environment
One of humanity’s greatest and most pressing challenges is climate change. 200 countries gathered at the COP26 climate change conference in November 2021 in a bid to create a framework to limit temperature rise to no more than 1.5 degrees and reduce carbon dioxide emissions to zero by mid-century .
Failure to meet this commitment is expected to lead to more extreme weather events and rising sea levels, severely impacting the environment, food production and low-lying communities.
While no concrete agreement was reached at COP26, efforts continue and there is no doubt that global warming is more important than ever at the political, commercial and individual levels.
In this context, any sector seen as a major emitter of carbon dioxide emissions is in the crosshairs of regulators, especially if the use of energy is used to secure a decentralized form of money that challenges the power of central banks.
Limit the problem to the working certificate
To understand the risk of cryptocurrency regulation, we need to start with a better understanding of what it is about cryptocurrencies being considered so bad for the environment, because it’s really only a certain portion of cryptocurrencies that make a cryptographic number – Try or Work mining.
The main feature of cryptocurrencies is that they have no regulatory authority. They are decentralized networks of independent computers that agree on the exact balances of digital assets, such as new forms of money, through consensus mechanisms encapsulated in the software managed by the participating nodes.
- Proof of Work (PoW) is the consensus mechanism used by the largest cryptocurrencies by market capitalization: Bitcoin and Ethereum (although the latter will change later this year).
- PoW is an energy-intensive process as it requires a particular network participant, a miner, to demonstrate that they have done enough work for the transactions they leave to be accepted into a new block in the larger network.
This work is equivalent to consuming electricity in a competition to solve a random math puzzle, where the winner earns a block prize. The collective work of the network is measured by its hash rate, which is often considered a proxy for value as it is the foundation of Bitcoin and Ethereum security.
But given its environmental concerns, it’s also an Achilles heel, one of the reasons Ethereum is transitioning to Proof of Stake, the dominant consensus method for new blockchains.
What is the level of regulatory threat posed by labor certification?
The scale of carbon emissions from Bitcoin and Ethereum has been compared to mid-sized countries because it makes headlines, but while the reality is far more nuanced, it has inevitably led to calls for trial regulation or an outright ban. of mining work.
The March 2022 EU vote to ban PoW mining as part of the wider Markets in Crypto Assets (MiCA) process was narrowly lost, but it could be just one battle in the ongoing war. It is possible that the EU will classify PoW as unsustainable going forward, making investing in Bitcoin derivatives less likely from an ESG perspective.
The effectiveness of this disinformation campaign is demonstrated by the words of a member of the European Parliament in support of the ban:
Faced with this FUD, the Bitcoin community is organizing to counterbalance. For example, the Bitcoin Mining Council and the Bitcoin Policy Institute are trying to shift the focus from PoW to the growing use of renewable energy sources, and mining has a positive effect on the efficiency of the energy production process, but mud it still sticks.
In January, the US Congress held its first hearing on Bitcoin Mining, which revealed the usual misconceptions. No specific action will be taken in that hearing, but the information gathering will be used as part of a larger ongoing process in the United States to understand the regulatory issues posed by cryptocurrencies.
Regulating the nature of cryptography
One of the biggest existential threats to cryptocurrencies is currently playing out in US courts with two separate cases focusing on what cryptocurrencies are at its core.
In March 2021, the Securities and Exchange Commission sued LBRY, a decentralized media platform that allegedly offered and sold an unregistered security in the form of LBC tokens.
The SEC’s decision to single out LBRY is strange considering they are a very small fish in the crypto pool and ranked 835th in Coin market cap at the time of writing, but the outcome could have a huge impact on thousands of similar crypto projects . over there.
The SEC is a powerful US regulator whose threefold mission includes investor protection. This mission includes everything they consider a “security,” the definition of which is based on the famous Supreme Court case SEC v. W.J. How come. Howey’s current test attempts to determine if it exists:
“an agreement, transaction, or arrangement whereby a person invests his or her money in a joint venture  and can expect to receive profits solely from the efforts of the organizer or a third party.”
LBRY argues that LBC is a token with limited utility inherent in its platform, while the SEC argues investors should have expected profits.
While LBRY is championing his case and countless similar crypto projects, there is another hotly debated case being fought by the SEC and Ripple, the organization behind the cryptocurrency XRP, which has the seventh largest market cap.
Here is a precedent where the SEC successfully won a lawsuit against Kiki, a blockchain-based messaging app, against an ICO for its Ki token. The year-long case ended in October 2020 with a $5 million fine.
The outcome of the XRP and LBRY cases could have a huge impact on the future of cryptocurrencies as it could mean that most of the 16,000 tokens are unregistered securities. As if that weren’t enough, there is another legal battle currently underway in the New York courts that could undermine a key element of the DEFI protocols structure.