Bitcoin’s Role in Recent Digital Asset Regulation

It is critical that both policymakers and consumers understand the natural protections Bitcoin provides them as a result of its decentralized design.

It is critical that both policymakers and consumers understand the natural protections Bitcoin provides them as a result of its decentralized design.

With DeFi scams, exploits, and crashes becoming more common within the digital asset space, the need for comprehensive regulation that protects consumers has never been more important. While the space has often struggled with oversight from any kind of centralized body, the popularity of digital assets today and the plethora of applications that have been built using blockchain technology have necessitated the need for some level of security. regulatory guidance, especially to safeguard citizens. of predatory financial schemes that only serve to line the pockets of creators and their stakeholders.

Note: The cypherpunk group that originally originated many of the ideas around digital assets valued cryptography as a tool to protect themselves from authoritarian governments.

The purpose of this article is to provide an overview of Bitcoin’s role in digital asset regulation and why its differences from most other cryptocurrencies should encourage regulators to see it in a different light.

Last week, Wyoming Senator Cynthia Lummis, in a bipartisan collaborative effort with New York Senator Kirsten Gillibrand, released a proposed regulation surrounding cryptocurrencies and other digital assets. This primarily pertains to security and tax laws in the United States, but if passed could serve as a standard for other jurisdictions. This proposal is certainly good news for cryptocurrency developers and users; it serves to ensure that the United States can become a leader in digital asset innovation while protecting its own citizens against fraudulent schemes. While the entirety of the proposal is beyond the scope of this article, the main conclusions are presented below, as reported in this article at Fortune:

  • Digital assets, including bitcoin, should be treated as ancillary assets or commodities. This will make the Commodity Futures Trading Commission (CFTC) the main regulatory body overseeing digital assets instead of the Securities and Exchange Commission (SEC).
  • It clarifies the definition of a cryptocurrency broker, thereby protecting developers working on Bitcoin wallets, Lighting clients, or other tools from the same reporting requirements that may be imposed on a centralized custodial exchange like Coinbase.
  • It requires companies that raise capital from the sale of digital assets to disclose those sales to the SEC.

While this bill codifies and introduces some authority and oversight into the space, it does so while ensuring that development in the space is not impeded, a concern already raised by Jack Dorsey, among others. Senator Lummis, in particular, has long been a strong supporter of Bitcoin, and unlike her contemporaries, she focuses on innovation rather than just the potential drawbacks of its power consumption.

However, Bitcoin’s design gives it some unique advantages that should serve to make it a unique asset in terms of user protection and broader regulation. To begin with, many disclosure and transparency concerns around other base layer platforms do not apply to Bitcoin (they may apply to companies that create sub-assets or other products in addition to the Bitcoin blockchain) due to a lack of centralized organization. to oversee Bitcoin Operations. You’ll often hear the saying that bitcoin is the purest form of digital money because it doesn’t offer, or attempt to offer, anything different. You are not entitled to any special rights for holding bitcoin: you are not entitled to vote in any entity, you are not entitled to receive rewards in the form of performance, and you cannot gain control of the underlying protocol simply by buying more. due to the underlying proof-of-work consensus mechanism. This is not meant to mock alternative platforms that may offer these features. After all, many alternative platforms have played an active role in helping to decentralize the internet and have also enabled stablecoins (alongside bitcoin) to be an alternative financial instrument for those of us who are less fortunate. Rather, it is intended to underscore the fact that bitcoin is the best form of digital money specifically because of its simplicity.

In a previous article, I argued that it is Bitcoin, rather than the broader cryptocurrency market, that is helping to combat autorianism and acting as a tool for financial freedom. A variation of the same argument applies to differentiation from Bitcoin when it comes to thinking about regulatory specifications for digital assets. No centralized party within the vast Bitcoin ecosystem can exert significant influence over its protocol, nor can any party cause a new bitcoin to be created to meet some need that serves its own interests.

The core spirit that separates Bitcoin from other protocols is its decentralization. While many in the space argue that Bitcoin is actually quite centralized due to its supply distribution and the presence of mining pools, the reality is that measuring the decentralization of any protocol, be it a peer-to-peer network of digital assets , a government, or your local recreational sports league – it goes beyond simply analyzing quantitative data, such as concentration of hash power or concentration of wealth. Rather, perhaps the most important part of measuring decentralization is the decision power that any centralized party has to make long-standing decisions for the protocol. Most, if not all, alternative platforms have some sort of foundation or organization that makes significant protocol or tokenomic decisions (the economics of the underlying asset). In many cases, there may be some form of governance or voting mechanism that allows holders to vote on certain proposals. While this is certainly more decentralized than your traditional Web 2.0 protocol, let’s introduce Bitcoin’s decision-making protocol.

In Bitcoin, anyone can make a protocol change proposal through a Bitcoin Improvement Proposal (BIP). For the protocol change to be encrypted, it must be approved by the miners, whose current ownership has no weight. Most significantly, there is no centralized authority that can influence the miners’ decision. Bitcoin is much more like a software than a company, unlike alternative platforms. (The anonymous creator/founder has completely removed himself from the public eye and hasn’t transacted with his own bitcoin for nearly a decade.)

It is specifically this decentralization that allows Bitcoin to be a tool for human rights activists and those living in authoritarian countries. It is this decentralization that allows bitcoin to be a version of sound money and an active hedge against inflation. It is this decentralization that regulators and lawmakers need to take into account when designing the regulation of cryptocurrency-based assets. Senator Lummis and Senator Gillibrand’s proposal goes a long way in the right direction by specifically differentiating between protocols/assets that have characteristics of a traditional business and those that are independent, autonomous and help create legitimate change within our society.

This is a guest post by Archie Chaudhury. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.

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