Why blockchain regulation isn’t always a bad thing

More and more authorities review blockchain technology and consider regulatory measures. In general, most authorities have steered away for now in order to gain more time to get a better understanding and avoid hampering innovation, especially in the field of cryptocurrencies a number of rules have already been issued. While I’m generally in favour of not throwing the baby out with the bath water, some form of regulation might actually not be such a bad idea. In particular, the field of virtual currencies and altcoins is a good area to make a case for more regulation since it is also a sector that seems ripe for misuse and certainly could do with a bit of investor protection.

No country for young men

Italy isn’t a country that is at the forefront of digital transformation. It’s a great country, don’t get me wrong, I love the place, but that certainly isn’t one of its string sides. I can pay with my iPhone in dozens of shops in New York, I’m always amazed how quick and without effort I can pay contactless almost everywhere, but when I wanted to pay for pizza last week, the place wouldn’t even accept the debit card from bank around the corner.

Imagine my surprise when my father-in-law told me about one of his former colleagues making a fortune in no time through cryptocurrency investments. The guy could be a pensioner but instead he travels the country and promotes these kinds of investments. Given my interest in cryptocurrencies, I started to dig a little deeper.

What is onecoin?

The investments in question are supposed to be made in a cryptocurrency called Onecoin. Looking for information, you pretty soon come across some miraculous numbers: “OneCoin empowers millions of people by providing borderless, low-cost financial transactions and connecting them to the financial world. OneCoin has developed a loyal, global customer base of millions of people in over 195 countries and six continents”, the people behind it proclaim on their website. A message on Facebook read “Join us, more than 40,000 people have already invested in Italy!” That really is amazing for a country, which is probably fair to say, has a significantly lower overall acceptance of digital transformation than its European neighbours.

The idea is loosely based on Bitcoin, it seems. Overall amount of tokens is limited by a cap, miners are supposedly rewarded for proof-of-work. However, then it already gets a little bit suspicious: people buying Onecoin are basically buying an educational package, through which “each client gets access to a respective subject of study and the opportunity to gain an in-depth knowledge in financial markets, cryptocurrency, trading and investing. The educational packages are developed in partnership with university professors and presented through the OneAcademy platform.”

More red flags

That is only the beginning though: to open an account, you need to be invited by another “miner”, which immediately reminds me of the schemes of Bernie Madoff et al. My father-in-law was told that the investment couldn’t be redeemed for (at least) twelve months, but that there was nothing to worry, it was just like a fixed-rate bond.

So, it isn’t really surprising that as soon as you look it up you come across plenty of negative news. Wikipedia defines it as a Ponzi scheme, various regulators consider them pyramid schemes and the Italian regulator itself suspended Onecoin’s activities as far back as December last year. How is it possible then that in the same country you’ve got people promoting the investment in Onecoin?

The case for better regulation

Injunctions and bans like the ones from the Italian Antitrust Authority should be sufficient to prevent illegal activities like the promotion of fraudulent investment schemes. The reality is that enforcement seems to be difficult and the decentralized nature of cryptocurrencies is partly the reason for that. If it is banned in one country, you can easily try somewhere else and the decision of an Italian authority, for example, doesn’t mean that you shut down a server in Bulgaria or Hong Kong. The problem isn’t limited to a small number of credulous investors. Investments in cryptocurrencies are no longer open only to nerds or people with a very good understanding of the technology. The recent spike in Bitcoin prices is, at least in part, due to rising demands from “regular” investors in China and Japan. Being stretched for investment opportunities that provide a significant return more and more people turn to cryptocurrencies. Returns of more than 2000% as in some cases are likely to do the rest convincing people to throw all caution over board.

Thus investments in Bitcoin, Ether and the like has become more commonplace and easier to invest in, while the risk are not clear to investors. Therefore there is an increased need for investor protection to which some authorities have already responded with regulatory measures.

The case for blockchain regulation

Why extend the argument to blockchain beyond cryptocurrencies though? I’ve already expressed my concerns about introducing too much regulation too early in this article and on previous occasions. However, to an extent the above is transferable to other forms of investments based on blockchain technology. The same problems we see in cryptocurrencies will therefore be transferred to other instruments based on blockchain technology as well. The problem, for that reason, is also an issue for the acceptance and credibility of the wider blockchain community. Take Bitcoin, for instance, which many still primarily associate with scandals like Mt Gox, Silk Road and the Dark Net.

Thus, we may well advised not to immediately demonise the idea but rather foster a healthy dialogue, support the distribution of knowledge and make a case for sensible rules.