In this article I will explain why I believe there will be a division in the crypto industry, between RegFi (Regulated Finance) and ecosystems that will seek not to be regulated, which regulators define as the black market, and that is why I use the acronym DarkFi, (Dark Finance) in “honor” of them.
In fact, Dark.Fi exists. It is an anonymous engineering blockchain development, to create applications on its L1 based on privacy. It’s not on mainnet yet.
In recent years, cryptocurrencies have gained popularity as a form of investment and alternative means of payment.
Although adoption is not yet massive, the growth is notable, and has sparked the interest of financial institutions as a growing business, and subsequently of governments, in terms of regulation.
There are various sources of information, and not all of them are the same. Crypto adoption is difficult to measure, due to the anonymity of self-custody wallets, and it is very good that it continues that way, in my opinion.
The most prudent sources estimate that the number of cryptocurrency holders worldwide is around 400 million people in 2023 (5% of the world population).
Other reputable sources, such as Finder.com, cites that the global average of cryptocurrency owners towards the end of 2023 was 15%, reaching a rate of 17%.
Let’s look at some data on the global adoption of cryptocurrencies.
Where Grassroots Crypto Adoption Is Highest
Global Cryptocurrency Adoption Index (Statistics)(*)
(*)Writer’s note: the table from the cited source is not ordered by adoption rate
Anyway, the fact is that adoption is growing, and that is the main point of attention of regulators.
Arguing to provide a legal and regulatory framework to protect cryptocurrency investors and users, governments are imposing new legal regulations to seek to reduce the risk of fraud and prevent the use of cryptocurrencies for illegal activities, such as money laundering and the financing of terrorism.
Another important reason that governments base for the creation of new laws is that given the growth of business and the incursion of financial institutions, it is key for them to guarantee financial stability, so that the State does not lose control over the economy.
The vast majority of governments, and especially those of the G7 (Canada, France, Germany, Italy, Japan, UK and US), seek to maintain a monopoly on the issuance of money. Small countries like El Salvador have allowed Bitcoin to be money, but it is an exception, since most States consider Fungible Tokens issued on the blockchain as assets and not money. At the end I leave an article I wrote on this topic (1).
But what is the limit of laws to not invade the privacy and business decisions of people, and private institutions? What is the limit of regulators to advance the market to the point of hindering it?
The Increase In State Actions And Their Regulations. Examples Abound.
Several countries have established legal and regulatory frameworks to address the blockchain industry related to cryptocurrencies.
There are two types of stablecoins depending on their support, some with a reserve in fiat currency, and others the algorithmic ones, which are not backed by fiat money but by a computer code to keep their reserves stable to be linked to a fiat price.
In my opinion, the first cryptocurrencies will be the most regulated in the crypto industry, while the second will be banned in most countries.
Japan has become one of the leaders in cryptocurrency regulation, being the first country to introduce a license for cryptocurrency exchanges, and establishing strict requirements for the security of digital assets.
The European Union has proposed new regulations for cryptocurrencies, based on the regulatory framework of the Markets in Crypto Assets (Mica). This regulation will apply from December 30, 2024.
Recently a vote was takenanti-money laundering bill in the European Parliament, which requires cryptocurrency companies to collect more data on users, and which tools that provide anonymity services will be banned. You can read: EU will ban mixers and force crypto firms to surveil users in blow to DeFi.
The United States is also stepping up its actions. Last year the Securities and Exchange Commission (SEC) filed a lawsuit against Binance, alleging that the company operated as an unregistered stock exchange and illegally offered and sold securities, including the BNB cryptocurrency, for which its CEO, Changpeng Zhao, was prosecuted and is detained, and pleaded guilty to fraud and money laundering charges in 2023 and was sentenced to four months in prison.
Then, in recent weeks, the Department of Justice has arrested the founders of Samourai Wallet, accusing them of facilitating the means to launder illegal money, since they have developed a digital interface to mix bitcoins and obfuscate the blockchain tracking of Bitcoin in their Layer 1. You can read more in this journalistic note.
A couple of days ago, at the time of writing this article, the SEC has accused MetaMask of acting as an unlicensed stockbroker, since according to that body, it is dedicated to trading securities on behalf of clients, and for that reason, the FBI cautions against non-KYC Bitcoin and crypto money transmitting services as SEC goes after MetaMask.
These are just some examples of the increase in government action against the crypto industry.
But, on the other hand, several countries such as Switzerland and Malta have so far established cryptocurrency-friendly regulatory frameworks to attract companies and investors to their jurisdictions.
The Main Objective Is To Eliminate Crypto Privacy, But It’s Not The Only One.
Privacy is not a crime, says the well-known cypherpunk slogan, but it seems that for regulators it is.
They usually send the message that if you have nothing to hide, you should not fear KYC (Know Your Customer), that is, handing over all your data when you carry out activities with financial institutions (name and surname, identity document, residence address, telephone number, etc), because they “take care of us” from terrorism and money laundering by criminals.
The first problem with KYC is the theft of personal information, since a centralized institution owns your data and there is a single point of failure.
The second problem is the misuse of data, such as the sale of information, and that although this dishonest action is punishable by law, they do it in a way that makes it look like it was a leak, and that it was not the holders of the information themselves who are marketing it.
The third problem is the surveillance system imposed by regulators, which can take away freedoms. Many governments are tyrannical, and others not so much, but they still invade the privacy of citizens. Without going any further, in the 2020 pandemic, in some way and to different degrees, we all suffered from the prohibitions and confinement.
As I said, privacy is not the only goal, there is also the need for governments to collect taxes, and the voracious action is now also directed at the crypto industry. As an example is the recent case of Roger Ver, the entrepreneur and early Bitcoin investor, and therefore baptized ‘Bitcoin Jesus’, who was arrested in Spain, with a request for extradition from the United States, accused of tax evasion.
Regardless of whether he is guilty or not, it is striking how the United States Department of Justice highlights his nickname in the note published for this arrest: “Man Known as “Bitcoin Jesus” Evaded Nearly $50M in Taxes”, highlighting that it is a crypto investor who committed the fraud, sending a strong message to the industry.
Final Words
Tough regulations will cause the crypto space to be divided into two main groups of developments. One will be the blockchain industry as a modern banking system that will respect increasing regulations, it will be banking 3.0. Another will be a marginal ecosystem, in which the cryptoeconomy will be developed as a peer-to-peer activity in unregulated markets, which the legal system will surely call the black or illegal market.
In this list you can see the top privacy cryptocurrencies, although I consider that some of them have been “filtered” there, since they do not have the necessary characteristics to be so, but it is worth it anyway.
Some modern cypherpunks divide cyberspace into two large groups of actors, the Solarpunks and the Lunarpanks. They define the first as the optimistic, naive and innocent, who do not understand that their brightness invites predators to feed on them, and the second, the Lunarpunks, as those who use darkness to protect themselves and spread light, using technology. Of privacy.
You can see the explanation in this entertaining video.
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(1)The Impact of Current Cryptocurrency Regulation: Cryptoassets, Commodities, or Securities?
