While counterintuitive, regulation might just be the key to promoting mass adoption of decentralized platforms

There are three important attributes that make cryptocurrency and blockchain attractive: transparency, immutability, and trackability. In an ideal scenario, such a system does not require regulation, because transactions are confirmed through consensus mechanisms and maintained in a transparent and immutable distributed ledger. Central banks and third-party intermediaries are thus unnecessary.

While blockchain and cryptocurrencies have achieved some traction, we are stilll a long way to go before we have mainstream adoption, especially in the business and enterprise setting.

The search for trust in a trustless ecosystem

In essence, blockchain runs on a trustless ecosystem, wherein the parties involved in a transaction don’t need a trusted party or intermediary because the trust is inherent in the platform’s consensus mechanism itself. The use of private key encryption ensures security in transactions without the need to reveal the actual identity of each party. In gist, it does away with central intermediaries, such as banks, clearinghouses, or other such institutions.

However, this anonymity also makes it susceptible to illicit usage. Thus, there are calls for improving compliance, especially in relation to financial systems, which require know-your-customer (KYC) procedures. Such identity and access management will be necessary for enterprises to vet users, thus ensuring that the decentralized platforms are not used for money laundering, terrorist financing, or wash transactions.

Vulnerabilities in decentralized networks

Cryptocurrencies are generally secure, but they are still vulnerable to hacking and theft. Funds stored in hot or online wallets can be stolen if private keys are compromised somehow. Some online wallets like blockchain.info had been found to be vulnerable to cross-site scripting (XSS) attacks, for instance.

According to a report from cryptocurrency intelligence firm CipherTrace, more than $4 billion worth of crypto assets have been stolen or lost in the first half of 2019 alone.

Even the lengthy private keys are not safe from old-fashioned trial-and-error and bot-assisted hacks–for instance, if such keys were stored somewhere insecure. There’s also the threat of social engineering, which exploits human vulnerabilities to access wallets and infiltrate inadequately secured exchanges.

So what happens to those who’ve had their crypto assets stolen? How can they regain what they have lost?

Unfortunately, recovering stolen cryptocurrency is still impossible at the moment. There is no way to reverse a blockchain transaction even with compelling proof that the transfer was anomalous or unauthorized. It is a double-edged sword: confidentiality and immutability can be both beneficial and unfavorable. The advantages of blockchain and cryptocurrency can be abused for illicit purposes; it can also serve as a hindrance in rectifying mistakes.

Will regulation address these risks?

Regulation, when done properly, boosts trust in the industry and unlocks institutional money, which leads to better mass adoption. Regulation itself is not the problem, but the ambiguity and inconsistency of regulations imposed in different parts of the world.

Deregulation may be part of cryptocurrency’s DNA, there is need to compromise for reasonable and responsible regulation to bring cryptocurrency to mainstream use. Even the most obstinate supporters of alternative currency would agree that the establishment of safe, fair,and reliable market conditions is vital in promoting widespread crypto adoption.

Regulation can address blockchain’s potential for abuse and paves the way for sensible policies and procedures in securing digital assets. For example, asset custodianship ensures safe and insured storage and transport of digital assets. Monitoring and reporting will ensure compliance with accepted procedures and regulations.

Regulatory bodies don’t necessarily stifle currency decentralization. The fundamentals of cryptocurrencies like Bitcoin will remain intact even when a “crypto czar” (like what the United States has) is appointed to exercise oversight functions and rationalize the application of pertinent laws on crypto trading.

In the context of blockchain and crypto, central banks can still have a role–however, it should be limited to licensing companies that offer crypto products and services, transaction monitoring, and handling reports of suspicious activities with regard to Anti-Money Laujndering, AML, KYC, and Combating the Financing of Terrorism (CFT) regulations. Central banks may also issue stablecoins to promote stability and mitigate foreign exchange risks, market risks, liquidity problems, and other concerns.

Regulation can encourage innovation

Regulation signals the legitimization of cryptocurrency, which means authorities are expected to set policies that consistently set the framework for use while recognizing the legality of crypto assets. When it becomes clear that government policies stop becoming prohibitive, entrepreneurs and tech players will be encouraged to innovate. Eliminating policy uncertainties can accelerate the development of products and solutions that take advantage of crypto and blockchain’s transformative benefits across industries.

More companies will emerge to offer new crypto wallets, for example, that deliver better usability and security. Blockchain-based token companies will start offering products bridge gaps between crypto and traditional business models. Similarly, payment solutions and exchanges are expected to evolve further as they cater to more customers and more types of currencies.

Decentralization creates an environment wherein everyone has to look after themselves. There’s no one to turn to when things go awry, or when the system fails. No system is infallible, so it’s not a bad idea to welcome reasonable regulation if it results in accelerating mass adoption of cryptocurrency and blockchain.

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