By Dr. Sean Stein Smith

This article examines some of the current trends around regulatory and policy outlook as it connects to cryptoassets. Specifically, this piece outlines and describes why, despite being a predictable result of regulatory catch-up amid a desire to reign in some unethical actors, crypto crackdowns and bans are not the answer. Additionally, several key policy questions are included to form the basis for better and more robust policy conversations
moving forward.

Based on recent headlines, both in the United States and in other jurisdictions, there has seemingly been a shift in the how policymakers view cryptoassets and blockchain technology more broadly. Stated simply, the policy outlooks has seemingly shifted from relegating these sectors to the backburner to actively cracking down on these sectors and the market participants involved therein. Cryptoasset bans in major economies such as China, increased regulatory crackdowns in the United States, and a simmering sentiment that stablecoins post a systemic threat to global financial stability all point in the same direction. After ignoring or not understanding how blockchain and cryptoassets intersect with the rest of the global economy policymakers and regulators are moving aggressively to corral the fast developing space.

Such an approach will invariably lead to policy errors, unforeseen consequences, and a chilling effect on the innovative thinking that has driven such creativity and development in the sector at large.

This is not to say that cryptoassets should be left unregulated, and any opinions stating that this is the current case are incorrect in any event – there is certainly a place for responsible and well-informed regulation in the cryptoasset sector. Every business industry requires reasonable regulation and frameworks to protect both the consumers of these products as well as the market actors themselves.

Recent developments in the United States, however, indicate that this does not seem to be the case. The United States Senate recently (August 2021) approved the long-awaited infrastructure bill, totaling over $1 trillion in expenditures, but buried in the over 2,700-page document was a clause related to crypto. Distilling the technical language the primary requirement and impact of said requirement would be that any organization or individual involved in the processing, validating, or approving of crypto transactions for consideration would need to fulfill the same tax reporting and compliance obligations as a full-fledged crypto exchange such as Coinbase, Binance, or Kraken.

Such a compliance, reporting, and payment burden would render operating in the cryptoasset sector a non-started for smaller firms, discourage new capital providers from investing into new ventures, and potentially drive new investment into other jurisdictions. While the final language of this bill is still pending, the outlook for crypto investment, creativity, and development has turned decidedly chilly in recent months. That is a near-sighted and incomplete view of the situation; let’s take a look at why bans, crackdowns, and onerous regulations are not the solution policymakers are looking for.

Crypto attracts capital

It should be obvious at this point, but the blockchain and cryptoasset attracts and retains both financial capital and human capital to where it is encouraged and supported the most. Put simply, not every country or economic block in the world would be working on developing central bank digital currencies and other blockchain applications if the economic benefits were not obvious. The United States, home of the global reserve currency and the most liquid capital market in the world, has received significant benefit from the innovation and capital creation that has accompanied the crypto industry to date.

Cracking down, banning, or imposing onerous regulations on the blockchain and cryptoasset would simply lead to these ideas, individuals, and creators relocating to other jurisdictions. Crypto truly is a global industry, and making business difficult in one area will invariably lead to relocating to another, more hospitable location. Taxes, regulation, and policy decisions are not normally items that entrepreneurs are terribly interested in discussing, versus the business or industry itself, but these are critical factors toward creating a welcoming and friendly ecosystem for these organizations.

Crypto has already delivered

One common refrain among policymakers is that blockchain and crypto has been long on potential and short on delivery; this is an incomplete view of the ecosystem. Far from the early days of the sector, when engagement was limited to a relatively small group of expert users and coders, blockchain and cryptoassets are now easily available to any individual or institution. More specifically, bitcoin has been the best performing asset in the United States public markets since its introduction; it has truly democratized the wealth creation process that investing so often promises to deliver.

Setting aside the wealth creation aspect of crypto for the time being, blockchain is already being used by hundreds of major organizations the world over. For example, Forbes has published for several years an annual listing of organizations that have integrated blockchain into core operations with revenues totaling in the billions of USD. Benefits of increased blockchain and cryptoasset integration increased improved traceability of information, the ability to audit and confirm data in real time, lower fees and costs for payments, and better security over digital ecosystems at large.

Framed in that light, and supported by the reality that virtually every company of economic significance has invested in blockchain and crypto, the benefits of these technologies have clearly already manifested.

Good for national security

A common, and troubling, refrain that has recently gained steam in the ongoing debate around the growth of cryptoassets is that blockchain and crypto pose a threat to national security; the opposite is true. Acknowledging the improvements and upgrades that have been made to the international payment system over the last several decades the current payments infrastructure is still out of date when compared to the other technological tools and platforms that are available. Wires, ACHs, and other bank enabled transfers can take days to settle, carry with the hefty fees, and be time consuming to complete; blockchain and cryptoassets address these issues head-on.

Additionally, and from a U.S.-centric perspective, one of – if the largest – economic advantage that U.S. enjoys is the dollar’s status as the global reserve currency. This is privilege and not a right; other currencies have played this role before and there is no guarantee the dollar will always hold this role. In order to maintain this status, and like any other economic asset, the dollar will need to be upgraded and modernized for the 21^st and 22^nd centuries.

It might be tempting, especially from a policy making perspective, to treat the rapid growth and development of blockchain and cryptoassets as an existential threat to the status quo, but that is an incomplete and short-sighted perspective. Instead, cryptoassets should be viewed as a positive development and natural maturation of the online ecosystem and environment; digital and virtual payments have long been a mainstay of business and enterprise, and there is no reason to think that blockchain or cryptoassets will function any differently.

What this means from a policy perspective is that a more nuanced and balanced approach should be taken with regards to how blockchain technology and cryptoasset instruments are viewed and integrated into the mainstream financial markets. Crypto based and enabled transactions have quantifiable benefits that have been recognized and acknowledged by some of the largest and most established financial institutions the globe over; it makes sense that nation-states will seek to adopt a similar approach.

In terms of what this means from a direct, or action-oriented approach, there are several steps that can be taken in terms of what policymakers can actually do in terms of seeking to adopt blockchain technology or cryptoasset financial instruments into everyday transactions. What follows below is not meant to be an exhaustive listing, but should rather serve as a means to continue the conversation around this fast growing and emerging area.

1. Which cryptoassets are to be accepted by merchants and individuals in the jurisdiction in question, i.e. not every cryptoasset will be accepted as equally by every institution in question.
2. How will these cryptoassets be held and stored in terms of asset management, or in other words how will organization store and maintain custody over cryptoassets?
3. Regarding cryptoassets, is there a policy in place around how said cryptoassets will be reported on the financial statements of the organization?
4. Does it make sense to, alongside the development of crypto standards and operating guidelines, simultaneously build out similar guidelines for smart contacts, the programs that enable blockchains to communicate with other technology systems?
5. Is it reasonable to assess which types of cryptoassets will work most appropriately in certain marketplaces or use cases, i.e., the development of crypto products and services will change the narrative around crypto adoption; how should this be assessed?

Blockchain and cryptoassets are a fundamentally positive technology and suite of tools that have both the potential to, and actually influencing are, influencing how business decisions across different economic sectors are conducted. As with any new technology or innovative way of doing things, there will invariably be hiccups, disruptions, and downturns that occur; that is a perfectly normal part of the business and technology cycle. Policymakers the world over are often in a position of playing catch up to new and innovative technology, and so it is important for industry actors to serve in a dual role as educators as well as market actors. Policy oversteps will happen from time to time, but that is no excuse to simply let these policy errors define the market moving forward. Crypto needs relation but it needs to be smart regulation; crackdowns and bans are neither smart nor conducive to the continued growth of this sector.

About the Author

Dr. Sean Stein Smith is a professor at the City University of New York – Lehman College. He serves on the Advisory Board of the Wall Street Blockchain Alliance, where he chairs the Accounting Work Group. Sean sits on the Advisory Board of Gilded, a TechStars ’19 company and AICPA-CPA.com startup accelerator participant, and serves as a Strategic Advisor to the Central Bank Digital Currency Think Tank. He has a weekly column with Forbes, in the Crypto & Blockchain vertical. Sean is also the immediate past chairperson of the NJCPA’s Emerging Technologies Interest Group (#NJCPATech), where he hosts the NJCPA TechTalk Podcast, and is the President-Elect of the NYSSCPA Manhattan-Bronx Chapter.  He is a Visiting Research Fellow at the American Institute for Economic Research, with a book due out in Q4 2021. Sean is a sought after speaker on the topic of crypto and blockchain, and is an award winning researcher.

By Michael E. Lambert

The mining of crypto-currencies requires a large amount of electricity to be carried out, making it a significant challenge with the overall electricity consumption to mine Bitcoin equivalent to the annual consumption of electricity in New Zealand and growing at the time of writing.

In consequence, while some governments are actively trying to ban crypto-mining and, to some extent, their use for daily use (e.g. Turkey and China), others, like El Salvador, are embracing blockchain technology and wish to substitute the national currency with Bitcoin. This strategy could be a game-changer in El Salvador, as if crypto-currencies become the main standard, it would guarantee a rapid increase in El Salvador’s national GDP and public spending associated to it, combined with improved security features associated to blockchain technology by contrast to currencies such as the US dollar.

On the European continent, another “almost” country, Abkhazia, which is considered a separatist by Western governments and a full-fledged country by Russia, has also moved towards a more flexible crypto-mining policy.

Like in El Salvador, the positive signs in favour of crypto-mining have already had an unexpected impact on Abkhazia’s foreign policy, with electricity shortages that have led to stronger ties with Moscow to ensure cooperation regarding power supply, and a rapid increase in the number of Abkhaz millionaires.

If Abkhazia’s strategy succeeds in establishing a long-term crypto-strategy, the territory may be able to rely on a currency other than Russian ruble (Abkhazia is using the Russian rubble instead of its own currency) in a few years from now, thereby diminishing Moscow’s influence in the region. Furthermore, taxes on crypto-currencies could increase the state budget allocated to renew infrastructure, with Sukhum airport in the spotlight.

The new legalisation of blockchain per se raises concerns in the West (US-EU/NATO), as an increase in GDP implies additional spending on foreign diplomacy – which is mostly expected to result in increased recognition of Abkhazia – and military spending.

Abkhazia’s approach to crypto-currencies

In Abkhazia, the de facto Minister of Economy, Christina Ozgan, confirmed that the government is working on proposals to create the necessary conditions for mining crypto-currencies. This will include organising the supply of electricity from Russia and, in order to minimise the load on the electricity grid, providing locations to host crypto-currency mining equipment, taking into account the throughput and capacity of certain substations.

Nonetheless, the new stance on crypto-currencies remains ambiguous, as the local authorities wanted to ban mining in the first place, but it turned out that this would be difficult as it will require to investigate, arrest and prosecute residents carrying out such activities. Furthermore, it turned out that some of the largest crypto-currency miners are government officials who have the ability to set up a crypto-currency farm (mining in the crypto-currency world is done on “farms”), which usually means people with leverage in the Abkhaz society.

Some might argue that Abkhazia has not fully developed a strategy and that mining/selling crypto-currencies is more of a way to make some extra income than a genuine state policy. As such, the authorities could have taken a more sophisticated stance by leveraging Tether¹  instead of the Russian rubble to provide greater stability in the first place (Tether is pegged to the US dollar so prices remain more stable than the Russian rubble) or even developed their own national crypto-currency.

Similarly, no policy has been adopted by the government regarding state-owned crypto-currency farms. This is rather surprising as the Abkhazian authorities are the ones with the skills to develop and invest in such infrastructures on a large scale, thus enabling the storage of crypto-assets in the national reserve to ensure the payment of national debts to Moscow.

Albeit Abkhazia has an official currency (the Abkhazian apsar²), the residents use Russian rubles for daily payments. As such, it would have been feasible to switch from Russian rubbles and Abkhazian apsar to Bitcoin or another crypto using less energy, like Ethereum³, though Christina Ozgan did not suggested it.

How will Russia react?

The Abkhazian posture on crypto-currencies has not impacted Russian support for Abkhazia as of today. This si understandable because Moscow gave crypto-currencies such as Bitcoin national legal status in 2020, while prohibiting the use of digital assets for payments, claiming that only the Russian rouble could be considered a legal currency. Abkhazia is likely to follow the Russian approach in this regard.

Therefore, some might ask, how will Moscow react if the Abkhazian authorities follow El Salvador’s lead and switch from the Russian rouble to crypto-currency in the near future? This is not yet under consideration, but it could be, as crypto-currencies are more suitable for travel and cost-free money transfers, making it easier to restore links between the Abkhaz diaspora and the Abkhazians who remain in the motherland. Moreover, banks such as the British Revolut⁴ have enabled person-to-person crypto-transfers, which is  another step forward in global adoption of digital assets for payments.

Despite these signs, and given Abkhazia’s dependence on Russia for the import and export of all kinds of goods, including military equipment, it is reasonable to assume that the local authorities will continue to rely on Moscow’s assistance even if the Russian rubble disappears.

Furthermore, crypto-mining is an opportunity not only for Abkhazia, but also for Russia, which could have a prosperous partner in its neighbourhood capable of purchasing more Russian products and military equipment. In short, crypto-mining activities are welcome on both sides and should not impact Abkhaz-Russia relations but in the energy sector. 

How the West and Georgia will react?

In a recent The National Interest article entitled “Bitcoin Is a Threat to National Security” (Ramon Marks and David Harvilicz, 2021), the authors mention the risk of high inflation of the US dollar due to investment in Bitcoin, considering crypto-currencies to be a threat to the worldwide economy.

This approach is rather conservative as it assumes physical currencies will continue to exist, even though they have no comparative advantage versus blockchain technology. The two authors argue that a country should be in charge of the national currency with central banks, which is surely relevant in states like the United States, but less so for others with high-inflation such as Venezuela, and even less to unrecognised or partially recognised states like Abkhazia and Transnistria.

Meanwhile, another article entitled “How decentralized finance will transform business financial services – especially for SMEs” (Rebecca Liao, 2021), published by the World Economic Forum, is more optimistic about how crypto-currencies will empower citizens and increase business capabilities. Ultimately, it seems that national currencies and crypto-currencies will have to co-exist until a more global consensus is reached between pro-cryptos and crypto-sceptics.

While the debate rages on in the West, the recent legalisation in Abkhazia has raised quiet but real concerns in Georgia, as a well-off Abkhazia would mean increased investment in national infrastructures and foreign diplomacy.

Overall, Abkhazia’s size and population (about 1/2 million) do not pose a military threat to Georgia, even with a massive spending on new military equipment, but the Abkhazian authorities might be tempted to spend more on foreign policy and thus on an active strategy for recognition of the territory, which would be detrimental to the Western policy of non-recognition.

Ultimately, a prosperous Abkhazia would have the means to advocate for greater recognition and to develop new partnerships or at least to renew the infrastructure that brings greater attention to the country, such as the railway and the international airport which is not welcoming tourists since the collapse of the USSR.

Despite the concerns, the West should not take a stance against crypto-currencies as its main ally in the South Caucasus, Georgia, is also among the world’s leading crypto-currency countries and has no legislative restrictions on trading and, to date, does not require a licence for such activity.

Furthermore, Georgia offers a high degree of tax certainty and an advantageous tax system for businesses involved in crypto-currencies, and it was estimated by the World Bank in 2018 that at least 200,000 people in Georgia are involved in crypto-currency mining.

• `Individuals in Georgia are exempt from income tax on any profit received from the sale of crypto currency;
• The sale of the crypto currency or its exchange for Lari or other currency is not subject to VAT (applies to transactions between legal entities and individuals);
• The sale of computing power (hash) from Georgia abroad is not subject to VAT. In addition, individuals and legal entities retain the right to input VAT;
• The sale of computing power (hash) within the territory of Georgia (between residents) is subject to VAT;
• A hash purchase by a Georgian resident abroad is subject to VAT.

Unlike Abkhazia, the Georgia House of Representatives has even passed a bill that calls for state education officials to implement a study program based around financial literacy for high schoolers with cryptocurrencies on the curriculum list.

As such, Georgia and Abkhazia have been living apart for over three decades but seem to be on the same path when it comes to crypto-currencies, and miners on both sides will increased electricity consumption and pressure on infrastructure, as no plans for upgrading the internet and energy supply have been put on the table in both Abkhazia and Georgia.

In conclusion, unlike El Salvador, Abkhazia and Georgia do not have a long-term strategy, but it is certain that cryptocurrency mining will put a strain on infrastructure – internet and energy capabilities – and, although cryptocurrency mining is now legal, more domestic cyber capacity will be needed on both sides to control this new source of revenue and ensure that residents pay the related taxes.

The primary regional security concern as such is that Abkhazia could become even more dependent on Moscow due to the lack of electricity in the region, which would make Sukhum/i willing to accept more concessions due to the lack of Abkhazian domestic investment in the energy sector and internet-related infrastructure. This could also prompt Abkhazia to seek greater involvement of foreign partners to upgrade infrastructures, but so far no country other than Russia has shown interest in helping Abkhazia in this matter.

The upcoming months will provide us with more details when it comes to the strategy adopted by Sukhum/i and while Bitcoin could become the main currency, another option would be the adoption of the 2nd most famous, Ethereum, which is now more stable and with its update (Ethereum 2.0) requires at least ~99.95% less energy.

About the Author

Michael E. Lambert, PhD is a political psychologist and social engineer working at the intersection of medicine (social psychology and psychopharmacology) and political science, expanding the topic of mathematical models of strategic interaction among decision-makers to ensure the effective implementation of Blue Ocean Strategy in international politics.

References

• Gela Barshovi, Insight: Taxation of Cryptocurrency in Georgia, Bloomberg, (Dec. 16, 2019), https://news.bloombergtax.com/daily-tax-report-international/insight – taxation – of – cryptocurrency – in  – georgia
• Irina Lopatina, Georgia: Features of Taxation of Crypto Currency in Georgia in 2020, Mondaq, (April 06, 2020), https://www.mondaq.com/fin-tech/912924/features – of – taxation – of – crypto – currency – in – georgia – in – 2020
• Ramon Marks, David Harvilicz (2021), Bitcoin Is a Threat to National Security. The National Interest (https://nationalinterest.org/feature/bitcoin-threat-national-security-183442)
• Rebecca Liao (2021), How decentralized finance will transform business financial services – especially for SMEs. World Economic Forum (https://www.weforum.org/agenda/2021/07/decentralized-finance-transaction-banking-smes/)
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