Is government oversight non-negotiable for the future of crypto?

At the heart of crypto and blockchain tech is the concept of decentralization, which avoids oversight by a central authority, but some form of government control might be inevitable to help them achieve mainstream adoption. 

Governments have already been reluctant to allow the crypto industry to thrive without some form of controls and regulations, and much of the crypto industry is still unregulated.

A Dec. 19, 2023, PricewaterhouseCoopers report found that 42 countries discussed or passed crypto regulations and legislation in 2023. However, many still lack a clear regulatory framework.

Speaking to Cointelegraph, Lance Morginn, president of analytics and marketplace risk management firm Blockchain Intelligence Group, said he thinks crypto could go mainstream without government oversight. 

“Crypto can go mainstream without government oversight, especially in underdeveloped economies where traditional financial systems are less effective or inclusive,” he said.

“However, there must be no trade-off. Stringent regulations could choke innovation and defy the very foundation on which cryptocurrencies grow wider in adoption — decentralization.”

Both El Salvador and Argentina are among the poorest countries in the world. In September 2021, El Salvador became the first country in the world to adopt Bitcoin as legal tender, following the announcement of the Bitcoin law.

El Salvador’s crypto treasury is now $71 million in profit, according to the Nayib Bukele Portfolio Tracker website.

Recent reports indicate Argentina might be considering emulating El Salvador’s approach to Bitcoin (BTC) and other crypto plans to help its ailing economy as well.

At the same time, Morginn thinks that for crypto to reach its full potential, “regulations are essential” to help signal that the space is safe for use and investment.

A Feb. 22 survey report from key management network Web3Auth, which had 3,378 responses from Web3 users, developers and decision-makers worldwide, found that security concerns and risks were the top reasons cited for avoiding the tech.

“Crypto gave birth to new innovations and financial opportunities, decentralized finance (DeFi) lending [and] non-fungible tokens (NFTs), to name a few, or improved over traditional finance with faster transactions, lower fees and more,” Morginn said. 

“But they also introduced new risks and vulnerabilities to the financial ecosystem. Past high-profile exchange hacks and DeFi scams, such as rug pulls, have exposed vulnerabilities that threaten the whole reputation of digital assets as a legitimate industry.”

CertiK’s annual “Hack3d: The Web3 Security Report” for 2023 found over $1.8 billion in digital assets were lost across 751 Web3 security incidents in 2023.

Cybersecurity firm Cyvers’ mid-year Web3 security report has calculated the total volume of stolen crypto funds in 2024 is approaching $1.4 billion.

Morginn says government oversight may help contain these “risks and eliminate the vulnerabilities” but also fuel innovation even further, helping “it mature into new age products and services all within a safe environment.”

“We will witness the full potential of the digital assets industry when individuals feel their deposits won’t be taken advantage of and institutions have enough capital on hand and are limited from offering overly risky products,” he said.

“It’s important to acknowledge that regulations may initially slow the breakneck pace of some advancements. However, this could ultimately lead to reliable and widely adopted products and services,” Morginn added.

Hundreds of millions already use crypto 

Kristin Smith, CEO of the Blockchain Association, a Washington, D.C.-based blockchain advocacy group, told Cointelegraph that crypto is already a mainstream tech due to the sheer number of people operating in the space.

A January 2024 market sizing report from cryptocurrency exchange Crypto.com found the global number of crypto users increased by 34% in 2023, growing from 432 million to 580 million people.

“With more than 50 million Americans owning or investing in crypto, I see it as already being mainstream,” she said.

“Importantly, the future of the American digital asset industry must be — and has emerged as — a significant policy consideration in this election cycle, reflecting the technology’s growing importance.”

A bill clarifying the roles of the United States securities and commodities regulators in policing crypto passed the Senate on May 22.

Smith says legislation like the Financial Innovation and Technology for the 21st Century Act, or FIT21, is a tick of approval for the industry and a sign of the growing momentum toward regulation.

“Momentum is on our side in Washington and across America. As more Americans use and invest in crypto, the more we’ll see this solidify itself as a bipartisan priority,” she said. 

“The industry is eager to work with policymakers to craft fit-for-purpose, pro-innovation crypto legislation; we’re encouraged that recent legislation, including FIT21 and the repeal of SAB 121, received bipartisan support and passage.”

In May, a resolution to overturn the US Securities and Exchange Commission’s (SECs) SAB 121 rule received bipartisan support in the House of Representatives (228–182 votes) and Senate (60–38) before outgoing President Joe Biden vetoed it.

SAB 121 mandated SEC reporting entities custodying crypto record those holdings on their balance sheets.

Oversight could be a good thing in the long run 

Speaking to Cointelegraph, Ben Caselin, chief marketing officer of South African cryptocurrency exchange VALR, said that as crypto networks and markets continue to gain significance, government oversight wouldn't be the worst idea.

“As crypto networks and markets continue to mature and gain significance in socio-economic affairs, it is expected and would be in the best interest of society if there was some form of oversight, especially with respect to centralized trading platforms and custodians,” he said.

“A balance between the individual, the community and institutions is what needs to be found for global finance to take full advantage of this innovation and prosper. A maturing crypto industry requires all stakeholders to step up their game.”

Ankur Banerjee, chief technology officer and co-founder of decentralized data infrastructure provider Cheqd, told Cointelegraph that crypto requires government oversight to become mainstream.

“The challenge is that crypto moves so fast that it’s hard for legislators to catch up and pass legislation that wouldn’t be outdated immediately,” he said.

In May 2023, the European Council adopted the first comprehensive legal framework for the crypto industry. Other countries and jurisdictions have been slower in creating a framework for crypto, with some outright banning its use.

“Government oversight into crypto should probably take the form of a regulatory body like national aviation agencies such as the Federal Aviation Administration (FAA),” Banerjee said. 

“Where the legislation allows a government body to create oversight, but the agency itself has latitude on implementing safety directives and can respond faster to new developments within the crypto space,” he added.

More crypto, more government attention

Speaking to Cointelegraph, Alex Linton, director at global privacy tech not-for-profit OPTF, says he doubts billions of people could flood into the space without attracting the attention of governments.

“It would be naïve to think we freely scale to billions of users without meeting with government forces,” he said.

“The more crypto is used, the more strongly governments will demand oversight.”

According to analysts from crypto exchange Bitfinex, the total number of crypto users could reach new highs of over 850 million if current bullish market conditions continue through 2024.

“So far, crypto has mostly been subject to financial regulations, but we will soon see crypto gain relevance in other policy areas,” Linton said.

“Current approaches to regulating social media fail to account for SocialFi, for example.”

Linton says this process won’t be “neat and tidy” because regulators will want some central authority they can communicate with and hold accountable if anything goes wrong.

“In many cases, tech policy would need to be completely reframed for it to be appropriate for decentralized platforms,” he said.

“While it’s important for the industry to work together with policymakers to encourage responsible building, we must draw the line at creating single points of control or authority over decentralized technologies, whether they be companies or governments,” Linton added.

Iva Wisher, co-founder and chief operating officer of gaming NFT marketplace Prom, told Cointelegraph he thinks the institutional regulation of crypto is inevitable due to the influx of money and users.

According to CoinShares data, inflows into digital asset investment products have hit a new record of over $17.8 billion year-to-date, significantly surpassing the previous record of $10.6 billion set in 2021.

“The next wave of adoption has two perspectives: regulatory frameworks can provide legitimacy and security, attracting more investors and users, leading to wider adoption,” Wisher said. 

“The extent of regulation’s impact on innovations and crypto’s decentralized nature remains uncertain. Adoption could both mean more daily users or growth derived from truly decentralized solutions, what we want to achieve is an open question.”