Two Sides of the Coin: How regulation can stifle--or encourage-- fintech innovation

Just last week, protestors 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 to his involvement in writing the protocols for the Tornado crypto platform, which was sanctioned earlier this month by U.S. officials, who say it has been used by North Korean hackers.

North Korean hackers–and any criminal or malicious hackers– are bad. But the protestors were right to demonstrate. This arrest sets a dangerous precedent and is a threat to the continued tech innovation that is essential to our future society and economy, especially the crypto sector. It is a glaring example of regulation and government oversight going too far. 

While institutions and platforms can be asked to take certain steps to safeguard against their use by criminals–and such regulation will likely bring more legitimacy to the sector— there should be a stopping point. Law enforcement and regulatory authorities have failed to admit this. Unless something changes, we are headed into a situation where government oversight risks becoming a sort of thought police and can stifle new business or tech ideas before they are even developed. Engineers and entrepreneurs will fear carrying out new and innovative projects.

There is no question that new technologies, especially those with the creative potential that could disrupt the entire economy, present ethical and legal dilemmas- as they can be used for good or for ill. In most cases, blockchain technology allows the public to see a user’s, albeit anonymous, history of transactions. Some, like Tornado, prevent this. One can argue this makes coin transfers just as private as traditional bank transactions, which are not available, even anonymously, to the public view. It can also aid 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 any sector. For example, technology like NSO’s Pegasus, can–and many say has––been used for unethical purposes, but at the same time it has also aided police departments and other authorities in investigating 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 paying attention to Pertsev’s fate.

This is not to say that the use of protocols for illicit behaviors shouldn’t be scrutinized and penalized. When technology is misused, especially in a way that damages lives or public safety, there should be legal consequences. But because technology, from spyware to blockchain to social media, can be used for good or ill, it should be those using the technology for unethical or illegal purposes–rather than its developers—who are held responsible by regulators and law enforcement officials. (Of course if something is developed solely to cause harm, or if developers encourage harmful or unethical use, that is a different situation.) In the U.S, computer coding in most cases is theoretically protected by the First Amendment, as a type of free speech. But that is not the case in most other places, and is not necessarily enough even in the United States to shift the blame for misuse 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 helped lead to the market’s recent $2 trillion value crash. Reasonable regulation can guide and encourage the development of new technologies and products, and grant more legitimacy to a young industry. Examples of positive steps on the regulation front include the U.S. Federal Reserve and FDIC requiring banks to check with them before carrying out crypto-related activities to make sure they are legal; and SEC Chairman Gary Gensler recently explaining a plan for regulating crypto trading platforms. In addition, the FDIC recently ordering crypto broker Voyager Digital to stop claiming assets on the platform were FDIC-insured when in reality they were not is a positive example of regulatory enforcement. Such steps or potential steps protect consumers but are a reasonable burden for platforms.  

And law enforcement should be monitoring the crypto and other online sectors for fraud and crime—crimes and fraud here are a growing threat. But it shouldn’t be the developers and engineers who are sitting in police custody; that should be reserved for those who actually misuse technology for illegal or nefarious purposes.