The launch of Bitcoin was supposed to be a declaration of independence. It was the people telling the government that we now had the technology to create our own currency. We didn’t need a central bank to tell us how much interest to pay or to set the rules for capitalism. We’d determine for ourselves how quickly the money supply grew and let the blockchain do its thing.
It hasn’t quite worked out that way.
Governments around the world soon started taking in interest in what was happening in the crypto scene, and they’ve been drawing up their own plans to regulate it ever since.
There are three reasons that regulators want to place rules on the use of cryptocurrencies.
The first is to prevent money-laundering. Many of Bitcoin’s first advocates were merchants on the Dark Web who saw a way to buy and sell illegal goods without leaving a money trail. That use of bitcoin soon spread to money laundering. Between 3% and 4% of all the money made by criminals in Europe is believed to be converted into cryptocurrencies to hide its origins. That could amount to as much as $5.6 billion.
Regulators also want to protect buyers. Companies that sell shares or look to win investors have to open their books and tell the public who they are, what they’re doing and how much they own. They’re required to supply a certain amount of information so that investors aren’t defrauded and can know exactly where their money is going as they use it to help entrepreneurs and share in the profits.
And regulators also want to protect the financial system. Taxpayers bailed out banks after the last economic crash because the alternative would have been a deeper and longer recession. If the public has to be the lender of last resort, they get to make demands in return for their guarantees. Governments want to be sure that the collapse of a cryptocurrency financial institution, like Mt. Gox, can’t cause such great harm that they have to intervene.