Effective Crypto Regulation Starts at Layer 1

Central Bank Policy Trends Cryptocurrency

Summary:

Objections to on-chain enforcement should not give regulators much cause for concern.

Take a moment to empathise with cryptocurrency regulators. We’ve tasked them with managing a constantly morphing ecosystem that is both plagued by lawlessness and built atop blockchain technology that thwarts outside control. The effort required to identify and apprehend pseudonymous criminals makes enforcement impracticable for most blockchain crimes, and no amount of effort can stop an automated decentralised autonomous organisation like Tornado Cash.

As a result, regulators are relegated primarily to know-your-customer processes via fiat on-/off-ramps to accomplish enforcement. In a decentralised, permissionless environment, relying on KYC alone is like attempting to tame the ocean by damming a few rivers. Effective regulation requires the full capabilities of law enforcement to protect property rights, remedy breaches of contract and intervene to stop crimes in progress.

Such capabilities are available through layer 1 protocols that enforce the law on-chain. These protocols obviate the need to seize private keys from pseudonymous criminals by enabling direct action on wallets and smart contracts. Officials invoke these protocols by obtaining a court order, just as they would for off-chain enforcement. For example, the US Treasury could shut down Tornado Cash by demonstrating cause to enjoin its smart contracts, or could seize assets by obtaining a warrant.

On-chain enforcement was unthinkable to most even a year ago but, having endured weekly hacks for hundreds of millions of dollars and frauds for tens of billions more, the blockchain community is ready to embrace it. Most market participants not only acknowledge the need for effective law enforcement but are demanding it. Many see on-chain enforcement as the best hope to thaw the crypto winter and establish blockchain as the backbone of mainstream commerce and the decentralised internet.

Adoption is already underway. Bitcoin SV (a top-50 blockchain proclaiming dedication to ‘Satoshi’s vision’) recently implemented a protocol for blockchain authorities to enforce court-ordered transfers of BSV coins. The community hopes this development ingratiates it with regulators and diverts users from legacy bitcoin. Similarly, Jurat’s layer 1 protocol enables consensus about the meaning of court orders so that nodes can execute them autonomously. The premise for on-chain enforcement is strong. More blockchains will follow.

There are several objections to on-chain enforcement, but none should give regulators pause.

First is the fear that tyrannical officials will seize digital assets. It is worth noting that those expressing this concern also own houses, cars and bank accounts, all of which the government leaves alone. Due process is an excellent protector of property rights, so limiting on-chain enforcement to valid court orders will keep digital property as sacrosanct as physical.

Potential for abuse by intermediaries is a second objection, but an exaggerated one. Bitcoin SV chooses trusted ‘notaries’ (assumedly solicitors) to interpret and publish court orders to the network. Jurat, by contrast, eliminates intermediaries by generating machine-readable hashes for judges to include in their docketed orders.

Third is concerns about ledger immutability. These misunderstand the on-chain enforcement process. Courts do not rewrite ledgers. Rather, they enforce the law through a new remedial transaction that changes the effect of a prior (illegal) one. They do not alter the ledger itself.

Regulators have multiple paths forward. Mandating minimum enforcement standards is one, but the multijurisdictional nature of public blockchains makes this impracticable. A second option is to do nothing. Self-interest should drive adoption given that property becomes more valuable as legal protections are strengthened. A third is for influential agencies like the US Treasury and the Securities Exchange Commission to offer a regulatory sandbox when providers use blockchains with on-chain enforcement. The move is justified because oversight is reduced when private actors can enforce legal rights (think of shareholder suits for fraud). This approach will also hasten legal protections on-chain – the ultimate goal for any regulatory scheme.

Source:JMichael Kanovitz

Risk Warnings and Investment Disclaimers

You understand and acknowledge that there is a high degree of risk involved in trading with strategies. Following any strategies or investment methodologies is the potential for loss. The content on the site is being provided by our contributors and analysts for information purposes only. You alone are solely responsible for determining whether any trading assets, or securities, or signal, or any other product is suitable for you based on your investment objectives and financial situation.

Quick Access to 7x24

Quick Access to More Editor-selected Real-time News

Full Access to Pro Video Channel

FastBull project team is dedicated to create exclusive videos

Real-Time Quotes

View more faster market quotes

More comprehensive macro data and economic indicators

Members have access to entire historical data, guests can only view the last 4 years

Member-only Database

Comprehensive forex, commodity, and equity market data

7x24

Real Time Quotes

Economic Calendar

Economic Calendar
Events
Holiday

Policy Rates

BANKS ACT (%) PREV (%) CPI (%)

English

简体中文

繁體中文

العربية

Home News Columns AI News Economic Calendar Quotes Videos Data Warehouse Analysis AI Signals Pro User Agreement Privacy Policy About Us

Risk Disclosure

The risk of loss in trading financial assets such as stocks, FX, commodities, futures, bonds, ETFs or crypto can be substantial. You may sustain a total loss of the funds that you deposit with your broker. Therefore, you should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources.

No consideration to invest should be made without thoroughly conduct your own due diligence, or consult with your financial advisors. Our web content might not suit you, since we have not known your financial condition and investment needs. It is possible that our financial information might have latency or contains inaccuracy, so you should be fully responsible for any of your transactions and investment decisions. The company will not be responsible for your capital lost.

Without getting the permission from the website, you are not allow to copy the website graphics, texts, or trade marks. Intellectual property rights in the content or data incorporated into this website belongs to its providers and exchange merchants.

Russia-Ukraine Conflict

The Fed

China-U.S. Relations

FastBull Spotlights

FastBull Featured

FastBull

Devin

Winkelmann

Recent Searches

Trending Searches

Quotes

7x24

Effective Crypto Regulation Starts at Layer 1

Source:JMichael Kanovitz

Risk Disclosure