How regulation can stifle – or encourage – fintech innovation
Just last week, protesters gathered in Amsterdam to speak out against the ongoing detention of Tornado Cash developer Alexey Pertsev. Pertsev is still being held without charge by Dutch authorities in connection with his involvement in writing the protocols for the Tornado crypto platform, which was sanctioned earlier this month by US officials, who say it has been used by North Korean hackers.
North Korean hackers – and any criminal or malicious hacker – are bad. But the protesters were right to demonstrate. This arrest sets a dangerous precedent and is a threat to the continued technological innovation that is critical to our future society and economy, especially the crypto sector. It is a glaring example of regulation and government supervision going too far.
While institutions and platforms may be required to take certain steps to protect against use by criminals – and such regulation is likely to give the sector more legitimacy – there should be a stopping point. Law enforcement and regulatory authorities have failed to admit this. Unless something changes, we are heading into a situation where government oversight risks becoming a kind of thought police and can stifle new business or technology ideas before they are even developed. Engineers and entrepreneurs will fear implementing new and innovative projects.
There is no doubt that new technologies, especially those with the creative potential to disrupt the entire economy, present ethical and legal dilemmas – as they can be used for good or bad. In most cases, blockchain technology allows the public to see a user’s, albeit anonymous, transaction history. Some, like Tornado, prevent this. One could argue that this makes coin transfers as private as traditional banking transactions, which are not available, even anonymously, to the public. It can also help those who want to hide transactions because they involve laundered or stolen money.
Technology with the potential for bad and good is not a challenge limited to digital currencies. Any technology with positive aspects can also be misused – in all sectors. For example, technology such as NSO’s Pegasus can – and many say has – been used for unethical purposes, but at the same time it has also helped police departments and other authorities investigate crime and terrorism. Because so many new technologies embody this ethical dilemma, even those who don’t care about digital currencies, or take them seriously, should be aware of Pertsev’s fate.
This is not to say that the use of protocols for illegal behavior should not be scrutinized and punished. When technology is misused, especially in a way that harms life or public safety, there should be legal consequences. But because technology, from spyware to blockchain to social media, can be used for good or evil, it should be those who use the technology for unethical or illegal purposes – rather than the developers – who are held accountable by regulators and law enforcement. (Of course, if something is designed solely to cause harm, or if developers encourage harmful or unethical use, that’s a different situation.) In the United States, computer coding is in most cases theoretically protected by the First Amendment, as a type of free speech. But that’s not the case in most other places, and isn’t necessarily enough even in the US to shift the blame for abuse from platforms to users.
There is no doubt that some regulation and guidance is needed, especially in the crypto sector, where crypto cowboys, naive business models and improper custody of funds contributed to the market’s recent $2 trillion value crash. Reasonable regulation can guide and encourage the development of new technologies and products, giving more legitimacy to a young industry. Examples of positive steps on the regulatory front include the US Federal Reserve and the FDIC requiring banks to check with them before conducting crypto-related activities to ensure they are legal; and SEC Chairman Gary Gensler recently explained a plan for regulating crypto trading platforms. In addition, the FDIC recently ordered crypto broker Voyager Digital to stop claiming that assets on its platform were FDIC-insured when in fact they were not, a positive example of regulatory enforcement. Such steps or potential steps protect consumers but are a reasonable burden on platforms.
And law enforcement should monitor crypto and other online sectors for fraud and crime – crime and fraud here is a growing threat. But it should not be the developers and engineers who are in police custody; which should be reserved for those who actually misuse technology for illegal or malicious purposes.
