Author: Mario Laul, Placeholder
Translation: Qianwen, ChainCatcher
One of the main obstacles to the widespread adoption of blockchain and smart contract applications has always been the lack of relevant legal and regulatory status and the constant controversies surrounding them. In order to achieve true innovation, blockchain systems must possess certain unique attributes that differentiate them from existing systems, thereby demonstrating the need for specialized regulatory treatment. The cornerstone of this innovation is “sufficient decentralization” – a characteristic that ensures reliability and resilience, even in hostile environments or other challenges. Without this characteristic, the network or application in question is more easily described as a traditional software project and therefore more easily categorized under existing regulations. Therefore, although the financing, early development, and launch of many blockchain projects are coordinated by a small group of people, “gradual decentralization” is one of their core long-term goals.
In theory, the final destination on the path of gradual decentralization is regulatory compliance, that is, the legalization of the blockchain industry without sacrificing the founding principles of the project. Compliance has been a decisive point of contention throughout the 15-year development of the blockchain industry. The reason why regulatory agencies and industry participants have been unable to reach a clear consensus on this issue is that, on the one hand, the existing regulatory framework is clearly outdated in terms of blockchain technology and the types of organizations it supports. On the other hand, true innovation often intertwines with more traditional structures and practices, which undoubtedly fall under established regulatory requirements. For projects that provide strong guarantees for transaction settlement and minimize central control points and failures, it seems to be an impossible task to navigate between these two worlds.
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This regulatory void cannot last forever. The dynamics between innovation, structural inertia, modifying existing regulations, or enacting new ones will eventually come to an end. In most cases, the activities of traditional organizations involved in the blockchain industry are subject to the jurisdiction of the existing laws of the jurisdiction in which the organization is located. The main uncertainties involve novel organizational forms, such as public blockchains, smart contract applications and their communities of distributed token holders and governors (decentralized autonomous organizations DAOs), related cryptographic assets, and emerging on-chain economies that are becoming increasingly integrated with traditional systems. The situation differs in different jurisdictions, so solving this regulatory challenge may still take several years, but ultimately, the resolution of this challenge must and will be achieved, paving the way for the further institutionalization of blockchain and making it a “global administrative infrastructure”.
Meanwhile, blockchain-based projects and their supporters will continue to explore the forefront of technological and governance innovation. Some projects may use their unique goals and environments to demonstrate their reasons for ignoring or staying away from regulatory discussions; others will actively seek and promote regulatory discussions. Some may come to the conclusion that decentralization is not the right path and return to more mature and traditional organizational forms. However, regardless of the approach taken, in order for blockchain and smart contract applications to achieve scale complementarity and competition with existing institutions, it is necessary to formally and clearly establish, operate, and interact with the legal and regulatory requirements necessary for these systems. This is an inevitable path.
The paths of gradual decentralization and gradual compliance are not contradictory, and they will eventually intersect. The challenge lies in the fact that although “decentralization” in cryptocurrencies has a widely global definition, regulation is currently and may continue to be a national or at least regional issue. Therefore, there is no universal compliance manual, except for the following truths that are self-evident to anyone:
- Seek legal advice applicable to specific circumstances;
- Make every effort to comply with all applicable laws;
- Seek to achieve balanced regulatory outcomes in disputed or ambiguous areas;
- Once clear laws/regulations are established, make every effort to comply with all applicable laws.
However, the current most important task is to ensure that the above objectives are not achieved at the expense of sacrificing the freedom to create and maintain open-source technology, nor sacrificing the fundamental elements of blockchain value propositions: the public verifiability of information, a lower reliance on human subjective managers (such as the automation of blockchain technology), and the achievement of power balance between institutions and individuals, leaning towards the latter (self-sovereignty). As long as this is achieved, regardless of how the law is ultimately regulated, the unique innovation core of the industry will remain unchanged.
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