Does overregulation lead to collapse?

Although the prevailing assumption is that bitcoin promises anonymity, this is untrue. In general, bitcoin and cryptocurrencies aim to offer secure financial transactions outside of government oversight. What is sought by cryptocurrencies is the algorithmic control of monetary transactions, replacing the power of banks and the state. This is the mission it serves and can lead to the success of cryptocurrencies.

Do cryptos promote anonymity?

Regarding anonymity, about which much has been said, one comparative advantage of bitcoin and cryptocurrencies is that transactions with them tend to be much more visible than bank transactions because no privacy rules like those of banks protect bitcoin holders.

It is straightforward for someone to observe transactions on the blockchain. Not only is the chain publicly visible, but since blockchain addresses have a unique identifier associated with them, transactions can be easily tracked as they move between addresses. What is needed is to map the ID to a specific person, which is usually easy because any movement in and out of fiat currency through crypto wallets happens through the regulated financial system, with the help of crypto exchanges that are forced to comply with regulatory requirements.

Thus, law enforcement authorities can successfully identify criminals who aim to use bitcoins to disguise their money flow; however, they cannot always arrest these criminals because they may reside in countries that may even encourage malware attacks.

KYC and AML

Despite the delay shown by the financial authorities to recognize cryptocurrencies as an accepted financial instrument, the regulatory authorities are now tasked with keeping cryptocurrencies in line with the goals of the authorities' regulations so that they are not seen as a threat.

Financial policymakers have mandated that most crypto exchanges comply with rules such as know your customer (KYC), anti-money laundering (AML), terrorist financing prevention and sanctions. All reputable crypto exchanges are now cooperating with regulators.

Do regulators act in paradox?

It seems a paradox that the regulatory authorities regarding cryptocurrencies are now concerned with protecting users in the financial system. At the same time, they focus on preventing catastrophic financial crises that may come from the crypto market without worrying if users take on high risks, i.e. they have significant crypto exposures with very negative net present value investments, as long as the risk is disclosed and the entity selling the service is regulated.

This seems like an anomaly in the system. Still, the crypto market is small compared to the overall global financial plan and very transparent, so it does not rise as a severe macroeconomic concern.

After all, the size of crypto assets is the same today as five years ago. Although the cryptocurrency's price has risen quite a bit since then and subsequently declined, there are no reasons today to believe that the cryptocurrency is causing more concern today as prospective cryptocurrency investors do not seem particularly likely to be excited by a future rapid rise in prices.

Overregulation may lead to collapse

As the authorities tighten the regulatory framework, Cryptos seem increasingly integrated into the mainstream financial system. This, however, is likely to distance it from the core of its ideology and erode it as, as said, cryptocurrencies are here today to replace, with algorithmic control, of monetary transactions and the power of banks and the state. If cryptos lose their aim, which is to secure financial transactions outside of government oversight, that could fuel activists for cryptocurrencies. At the same time, the authority's over-regulation of the crypto market would create suffocation and an inability to integrate the benefits of blockchain technology into the financial system.

In fact, actions by regulators to drive crypto into an endless effort to regulate the market when it doesn't need it since crypto architecture solves many regulatory problems will lead to limiting the use of crypto and ultimately cause it to collapse. Thus, the financial market will lose many benefits of the blockchain technology. And this is something that will need to concern all of us.