Viktor Prokopenya is a London-based fintech investor and the Founder of VP Capital, an investment vehicle focused on the technology sector.
Could we live in a world without rules? In theory, yes – we can live with an absence of government, and indeed our early ancestors did so. At its extreme, this is called anarchy – a state of disorder and lawlessness.
In reality, humans have found that regulations are the building blocks of a harmonious society and are critical to development. We need structures and rules to promote a positive culture.
The Noble Prize-winning economist Elinor Ostrom observed that when people have to manage shared resources such as land, fisheries, or water for irrigation, they spontaneously construct rules.
Indeed, through history, we have seen that every evolving industry goes through a process ending to a greater or lesser degree with regulation. The most regulated industries are those that have the potential to cause the most harm.
Take the case of the pharmaceutical industry – heavily regulated now, so that around the world, people can rely on affordable and safe drugs to protect their health. Before regulation, you had opportunistic conmen selling fraudulent cures to gullible members of the public.
Education is another example where regulation ensures the same high standards are upheld by different institutions, to engender trust across the sector. Food supply and hygiene is also heavily regulated, to safeguard a basic human need. In these industries and countless more, regulation has had positive benefits.
Currently, this debate is raging around crypto. Tesla CEO Elon Musk was recently asked whether the US government should be involved in regulating the crypto space. ‘It is not possible I think, to destroy crypto, but it is possible for governments to slow down its advancement,’ he said. ‘I would say, ‘Do nothing’.’
The whole crypto world is driven by one word – freedom. The simple fact that governments cannot access your wallet is already a huge win when it comes to freedom.
However, it does not mean that crypto should be used for criminal purposes and its image ruined by a minority using it for money laundering or crime.
This is particularly the case in emerging markets, where we must protect the system and consumers alike. Look at employment rights in places like Cambodia which would certainly regress in the absence of strong regulatory frameworks. Here, regulation acts to support economic growth and freedom.
Therefore, ensuring the industry is transparent, clear and law-abiding is the key to retaining freedom.
So for my part, I passionately believe that crypto needs to be regulated. Furthermore, I think that the industry should actively lead the way – and focus on the positive impact regulation can bring.
Because up to now, crypto has been the new Wild West – and if we want to change that and become part of the reputable financial framework, we have to accept that regulation is a necessary part of growing up.
Binance ignored regulation for too long and look what happened – it is now banned in many economies while allegations of tax fraud and money laundering are investigated. Regulation will come anyway as our industry grows – so let us welcome it. There are those who would curb the industry altogether, banning financial institutions from dealing in cryptocurrency and we play into their hands if we do not come to the table and behave responsibly.
Take the case of tech companies. The fact that tech companies were harvesting data without any limits led to GDPR and similar laws. Now, they are subject to an imposed framework and huge fines if they fail to abide by regulations. If tech companies had worked more responsibly with customers’ data and regulators, the restraints imposed could have been much lighter.
This is because, left alone, regulators err on the side of removing freedom. Working with regulators is the key to preserving freedom. Freedom is effectively choice. Previously, companies could choose what to do with data. Now, that choice has been removed.
Dialogue with regulators is the way to preserve this choice. If we want our industry to progress, there is only one way forward – we should help governments to shape regulation.
Hiding from this fact is childish and irresponsible towards employees, partners, and consumers alike. The trouble with a ‘head in the sand’ approach is that one day you wake up and see that the world has changed without you, and probably not in the way you wanted. Rather than having to adjust, it is far better to shape this shift.
We, industry pioneers, should act as custodians of the system, preventing its misuse and protecting consumers. Conversely, regulation without the help of practitioners can lead to mistakes and misjudgments, unintended consequences, and risk. Afterall, we are hardly the first industry that started with no rules. Twenty years ago, only a handful of countries mentioned the word ‘internet’ in legislation. Today most legal systems have adapted to the new connected world. The same will happen with crypto, whether we want it or not. The key is to lead this process and make it good. Thus, dialogue, discussion, and debate powered by informed opinion is the only way to move forward.
This will involve liaising with policy-makers in the UK, EU, and US, along with governments in other parts of the world where mining and crypto processing is currently based.
So what would good regulation look like?
Cryptocurrencies are at present largely unregulated in the EU. The European Commission’s proposed Regulation on Markets in Crypto Assets (MiCA) is before the European Parliament. It will form part of the EU’s Digital Finance Strategy and is likely to impact significantly the operation of the crypto market in the EU.
Again, here it is useful for experts to help shape this regulation. Of course, we should make sure that crypto is not a safe harbor for money laundering, criminal funds or other nefarious activities.
The World Economic Forum Global Future Council on Cryptocurrencies is producing interesting work in this field, such as its paper Navigating Cryptocurrency Regulation: An Industry Perspective on the Insight and Tools Needed to Shape Balanced Crypto Regulation.
The Kalifa Review of UK FinTech rightly recognizes that FinTech is not a niche or sub-sector, but a permanent technological revolution that is changing the way finance works forever. It also frames development in this industry around trust, and its necessary foundation in leadership, regulation, and the rule of law.
Some green principles addressing the carbon footprint of crypto are likely to be included in future regulation, and this is quite right – we have to ensure that cleaner technology and cleaner energy sources are used if we are to make next-generation finance sustainable. Critically, we do not need to see regulation as inherently threatening.
Part of the problem here is that crypto is a disruptive technology, so the individuals involved tend to be out-of-the-box thinkers, who do not like to be confined by rules.
There are others who are protectionist, fearing that mainstream attention will erode their profits. Human advance is not driven by fear, however, it stops us from making the most of our potential.
To be truly clever, we must rise above this natural reaction, and embrace the positives regulation brings – because rule makers are not necessarily against financial development. By and large, they realize that this is a genie that cannot be put back in the bottle, and can only be tamed and made into a friend.
Both at the EU and at the national level, European regulators have expressed support for blockchain technology and its potential for digital transformation in the finance sector. The defined aim of this regulation is to create an investment- and growth-oriented regulatory framework.
And here is where governments and crypto pioneers agree, growth can only benefit us all.
We can expect regulation to promote consumer and investor protection, market integrity, and financial stability, leading to increased legitimization of the sector. This synergy will attract new investors and allow crypto to expand into the mainstream.
In time, this will lead to greater legitimacy of the sector. In turn, the best operators will rise to the top and become more profitable, with shady competitors disappearing from the market.
Regulation is the next frontier for crypto – it is a mark of our industry’s success. We must not fear it, but instead embrace regulation as the next stage of crypto development ends.