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Is Crypto in Danger of Being Regulated out of Existence?

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By Nick Saponaro, CEO of decentralized payment platform, Divi Labs

Mahatma Gandhi once said, “First they ignore you, then they laugh at you, then they fight you, then you win.”

Today, crypto almost certainly finds itself in its ‘fight you’ phase, and more than any other time in its short life, is in a very precarious position. After over a decade of being ignored, sidelined and scoffed at by the financial elite, it’s fair to say that our industry now has their undivided attention.

This attention has brought many benefits. It’s helped drive investment. It’s generated partnerships with traditional brands and has piqued the interest of large financial institutions, which will further drive investment and adoption.

However, more recently, it has also triggered a barrage of what feels like coordinated attacks, designed to curb crypto’s influence and force it to conform to the very same system it was designed to displace.

A New Hope

But before we look at these threats in more detail, it’s important to take a quick step back and consider the industry’s founding principles.

Before the bull markets, the moon lambos and the tribalism, there was a man with a vision. He pictured a financial world free from vested interest, manipulation and money printing. One where buying power, bank accounts and other financial instruments were accessible to all, no matter their personal circumstances. 

He saw the potential of a censorship-resistant, borderless financial paradigm that treated people fairly, enabled them to extricate themselves from the clutches of the old world of money, and build financial freedom on their terms.

It was a dream that drew many of us to the industry and saw the creation of a community of inventors and innovators who wanted to help shape and share this new financial future with the world.

While Bitcoin specifically, and the crypto industry more generally, will almost certainly survive this latest winter, it is that dream that’s most under threat.

The Empire Strikes Back

Right around the time it was announced that the Ethereum Merge was on target to take place this year, there was a visible ramping up of aggression against the industry.

First came the Tornado Cash sanctions brought by the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC). Rather than target the minority who were using the privacy tool for illegal or illicit purposes, it imposed its will on the entire community, forcing token issuers like Circle to blacklist addresses that simply received USDC through the popular cryptocurrency mixer. It was a level of broad stroke censorship that hasn’t been seen previously and caught many innocent users in its snare.

Imagine if your money suddenly became inaccessible because it had once been used to buy drugs. That is effectively what has happened here. This incident was followed by a series of measures that look to further consolidate the fiat system’s power.

With Ethereum’s Merge to a proof of stake consensus algorithm happening, OFAC saw another opportunity to impose its will. Being that most of the block-producing validators are owned by centralized third parties, they’ve spied an opportunity to force compliance and ultimately enable censorship.

Further, the Federal Deposit Insurance Corporation (FDIC) has sent cease and desist letters to several custodians, every exchange is under investigation by the U.S. Securities and Exchange Commission (SEC), and Initial Coin Offerings (ICOs) have started getting injunctions.

Unlike many of my peers, I am a proponent of regulation. I feel it will legitimize the industry and bring us much needed credibility. It’s why we’ve taken a pragmatic approach to compliance at Divi Labs.

However, these actions are not regulation. This is unilateral enforcement of the worst kind. There are no rules. No boundaries. No clarity on what can and can’t be done. We still don’t have clarity on what was illegal. Was it the activity? Is it the technology? What if you wanted to launch a Tornado Cash competitor, would that be illegal?

Whether it is intentional or not, it’s hard not to conclude that this is a coordinated attack on decentralization, crypto’s primary value proposition, with the onramps and custodians being the most apparent attack vectors.

Consumer Protection or Power Grab?

To win any conflict, you need to divide and conquer. By isolating the onramps and custodians and making it impossible for them to follow their censorship resistant ethos, it is possible to cripple the industry and shake the confidence of participants who believe in crypto’s promise.

Much of this is being enacted under the veil of consumer protection, and while it is necessary to ensure people are better educated and aware of the risks, it’s not hard to see beneath the narrative’s thin veneer.

This has more to do with power and influence. When a disruptor begins to eat the lunch of large incumbents those incumbents either seek to destroy or to consume, control, and put it under lock and key. Comply or die.

It’s like Net Neutrality where every few years the Government tries to end the neutrality of the internet and make it less free, open and censorship resistant. They do it behind the guise of safety but really it’s about control and ensuring that established power bases are maintained. They have succeeded at breaking down net neutrality despite their failure from a legal standpoint in the same way they are attacking crypto: via the centralized third parties with the largest reach and user bases.

As enforcement continues apace and we see more players like Goldman Sachs and Black Rock enter the market, we will likely see the decline of crypto’s original intention as the industry consolidates under the same players that have always driven the financial markets.

This outcome spells tragedy. While the status quo has long benefitted the wealthiest, it has seen the decline of financial security for the majority. Look at what’s going on in the Fiat system. We are teetering on the precipice of a fundamental change in people’s ability to pay for things. Figures for the UK predict 18% inflation in 2023. There is no traditional financial product on earth that can keep up with that.

What Can Be Done?

As an advocate of ensuring that financial sovereignty is returned to where it should reside – with the individual – I have always harbored the hope that our industry would be able to fight off the forceful hand of traditional finance. But more recently, that hope is fading.

As much as I’d love to see more people taking up the cause, it is unlikely that the average person will fight for crypto’s independence, so it is up to the industry to act.

We need to find a way to reverse the failure of narrative. The founding message has given way to commercial goals resulting in hyperbole and false promises that have hurt the industry.

Meme coins with no utility and a lack of focus on fundamental value have driven crypto into a speculator’s market. I would argue that most people who bought crypto during the last bull run have little understanding of the technology or why it’s important.

Ponzinomics and degenerate gambling are too often at the forefront of discussion while the philosophical goals that impact everyone are often ignored.

Anthony Pompliano, a major crypto influencer, investor, and millionnaire once said Long Bitcoin, short the bankers. Now he is hailing Black Rock’s move into the space as massive for adoption.

My question to him would be, aren’t these the same bankers that the industry was created to disrupt?

About the author:

Nick Saponaro is the co-founder and CEO of Divi Labs, developers of a decentralized payment ecosystem that’s on a mission to improve people’s lives by making crypto easy and accelerating its mainstream adoption. A dedicated proponent of the founding principles of the crypto movement, Nick is working towards the delivery of a new paradigm for financial services. One that is truly decentralized, accessible to all, and works for everyone.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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