The False Dichotomy
As mercurial and arcane as regulation can often be, one can metaphorically infer an elegant narrative loop of the corrupt and their prosecutors seeking justice. Regulations are the toolkit of the lawbringer. But like all tools, they might be crude, old or simply misused.
Cryptocurrencies have not changed the human condition or the narrative loop. There will always be scams, bad actors and terrible outcomes despite the best of intentions. While cryptocurrencies can remove human judgement, they cannot remove human behavior.
A cryptocurrency designer has to take a position on what toolkit he will offer the regulator to correct bad events. The unique challenge cryptocurrencies face is that they are a product of regulatory and monetary failure28.
Culturally, many in cryptocurrencies consider government action to be corrupt, inept or ineffective. Therefore, they have little respect, patience or desire to endorse a special backdoor for a regulator or lawman to right wrongs. This act would be anathema to the entire purpose of cryptocurrencies.
On the other hand, counting exchange failures and historic events, more than 10 percent of Bitcoin has been lost or stolen since the protocol started on January 3rd, 2009. As of June 30th, 2017, the value lost or stolen comes to a little over $4 billion. And this figure does not account for Bitcoin and other tokens lost to scams and poorly formed ICOs.
Then there is the issue of privacy. On a macro scale, value flows through specialized channels that are regulated, rich in metadata and actively monitored by law enforcement, governments and international regulators. It is a well understood game with leakage occurring only on the cash side of affairs, which has been gradually diminishing as the world moves to digital money29.
The paradigm if cryptocurrencies did not exist would seem to be a world that increasingly treats financial privacy like social media content. There is none and one cannot opt out. Hence we have a dilemma yielding an apparent dichotomy.
A cryptocurrency designer can surrender principles and yield to whatever demands their local jurisdiction places upon their code, thereby compromising the privacy and integrity of their users. Or he can adopt a more principled, but anarchistic, philosophy that divorces itself from current best practices and laws.
For Cardano, we feel this narrative is a false dichotomy brought on by a lack of imagination. The reality is that most users are not concerned about rules existing for markets. They are usually concerned about sudden changes in the rules to benefit one or more actors. They are worried about a lack of transparency over who gets special privileges.
We need to distinguish between individual and market rights. Given that cryptocurrencies have a global reach, rights needs to be as user oriented as possible.
Privacy should be reasonable and at the user’s control, not a gatekeeper. The flow of value should be unrestricted. Value should not be subject to sudden forfeiture without consent.
From a market perspective, the marketplace needs to be transparent about the use of data, how funds will be handled within and everyone needs to play by the same set of rules. Furthermore, once the user has consented, then they cannot suddenly change their mind due to inconvenience. Counterparties need certainty as well.
But how exactly does one move from the abstract to an actual system? What should something practical and legal look like? We have broken our solution into three categories: metadata, authentication and compliance as well as marketplace DAOs.