Bitcoin Shouldn’t Suffer Crypto Regulation
Regulatory frameworks persist in categorizing bitcoin and other cryptoassets as a unified group, a choice that has influenced the formulation, enforcement, and interpretation of digital asset policy across various jurisdictions. As regulatory approaches evolve, the discussion increasingly focuses on regulatory design: how effectively current frameworks align with systems that are fundamentally different in structure, governance, and risk. The ongoing existence of a consolidated “cryptoasset” classification highlights the way regulation typically evolves in reaction to new technological advancements. Initial policy reactions often emphasize rapidity, uniformity, and clear administration, especially as markets progress more swiftly than the formal rule-making procedures can keep up with. When it comes to digital assets, the apparent similarities—like the utilization of cryptography, digital wallets, and online platforms—provide a practical foundation for broad categorization.
However, as regulatory frameworks evolve and transition from broad principles to specific operational rules, the limitations of this approach become increasingly evident. Bitcoin has functioned as a decentralized network for more than 15 years, lacking an issuing entity, central governance structure, or discretionary monetary authority. In contrast, numerous other cryptoassets depend on recognizable development teams, continuous issuance decisions, and intermediated systems for their operation and accessibility. In the United States, think tanks like the Bitcoin Policy Institute have crafted comprehensive frameworks that highlight bitcoin’s distinctive features, such as its decentralized structure and monetary properties, aimed at guiding policy and regulatory strategies that set it apart from other digital assets. One practical consequence of regulating under a single umbrella is that it can obscure the risk distinctions that regulators are attempting to convey to consumers. In the UK, consultation responses have highlighted scenarios where the regulatory framework categorizes a decentralized monetary network and a highly speculative token as if they belong in the same risk category, despite their distinct characteristics, varying levels of issuer control, and differing stages of maturity. Even with a cautious approach, the outcome can lead to consumer confusion, as the framework implicitly indicates that “cryptoassets” are interchangeable regarding risk, which, in reality, they are not.
The distinctions at play here are rooted in structure rather than philosophy. Contemporary financial regulation hinges on the principles of accountability, control, and organizational responsibility. Disclosure regimes generally operate under the assumption that there is an entity in place that can furnish information, make representations, and be held accountable for results. Supervisory frameworks frequently rely on intermediaries that can be licensed, monitored, and sanctioned when necessary. Applying these assumptions to a decentralized network lacking a central operator reveals that the fit is not always straightforward. This tension is particularly evident when regulations intended for issuer-led assets are uniformly imposed on all digital assets. Disclosures, governance, and ongoing compliance requirements may align well with tokens issued by companies or foundations; however, they can pose challenges in interpretation or implementation within a permissionless network. The outcome is a scenario of regulatory friction, where the rules find it challenging to align seamlessly with the systems they are meant to oversee.
Cryptoasset lending and borrowing serves as a compelling case study illustrating the friction that arises during implementation. Conventional consumer credit regulations focus on unsecured lending, evaluating affordability, managing arrears, and implementing forbearance measures. The primary goal is to mitigate default risk and safeguard borrowers against unmanageable debt. In contrast, numerous bitcoin-backed lending models are designed with a focus on collateralization, short durations, and automatic liquidation triggered when loan-to-value thresholds are exceeded. In this scenario, a framework designed for missed repayments and payment plans may find it challenging to align with a product where the primary consumer risk frequently involves collateral liquidation amid market fluctuations, rather than the conventional inability to repay a debt. Recent policy consultations highlight this challenge. Industry participants and policy groups are increasingly emphasizing classification and function over market behavior in their responses. These submissions advocate not for the elimination of regulation, but for enhanced clarity in the definitions and evaluations of various digital asset systems. The focus is on harmonizing regulatory obligations with visible risk traits, governance frameworks, and operational methods, instead of imposing standardized requirements.
Su Carpenter stated that, “As the UK develops its cryptoasset regulatory framework, it is increasingly clear that not all cryptoassets present the same risks or operate in the same way.” The current approach often fails to account for the differences in issuance, functionality, and use cases, potentially leading to a one-size-fits-all regime that could be detrimental. A proportionate, ‘same risk, same regulation’ framework hinges on regulators acknowledging these distinctions if the UK aims to sustain its competitive and credible standing as a jurisdiction.” Numerous responses suggest that a more risk-aligned strategy would differentiate between the asset in use and the activity being provided, instead of imposing blanket restrictions on an entire category. The matter also goes beyond just disclosure and oversight. Surveillance frameworks, reporting obligations, and compliance regimes frequently revolve around account-based systems and intermediated financial relationships. Utilizing these models in the context of bearer style assets or peer-to-peer networks brings forth practical inquiries regarding feasibility, proportionality, and effectiveness. These questions are becoming more pertinent as regulators aim to strike a balance between consumer protection, market integrity, and financial stability goals. Another recurring theme in the consultation feedback highlights that the restrictions imposed on regulated domestic firms do not inherently diminish activity; rather, they frequently alter the location of that activity. As onshore providers encounter stricter regulations or excessive compliance demands, consumers seeking access to specific products may turn to offshore platforms or decentralized protocols that operate beyond the regulator’s immediate oversight. In practice, this can undermine consumer protection by diverting usage from regulated firms to spaces characterized by reduced transparency, diminished safeguards, and limited options for recourse in case of failure.
Simultaneously, indications are emerging that regulatory perspectives are starting to more distinctly differentiate among various types of digital assets. Conversations regarding custody standards, settlement processes, and energy consumption are progressively recognizing bitcoin as separate from other cryptoassets. In certain instances, regulatory documents now highlight varying risk profiles and operational characteristics, even as formal frameworks continue to be broadly defined. This shift is incremental rather than comprehensive, yet it highlights an increasing acknowledgment that a single category may not sufficiently encompass the variety of systems currently functioning under the “crypto” umbrella. Crucially, this discussion is not centered on the clash between innovation and regulation, nor is it about the advantages of one asset compared to another; rather, it focuses on the intricacies of regulatory design. Accurate classification is crucial for effective regulation, especially as rules grow more detailed and enforcement intensifies. When classifications blur significant distinctions, there’s a danger that regulation turns out to be either overly broad or ineffective, creating burdens that miss the real risks while neglecting to consider those that truly matter.
The repercussions of this strategy are becoming increasingly apparent in the UK. Freddie New, Chief Policy Officer at Bitcoin Policy UK stated, “At present in the UK, consumers new to the space are presented with a universe of thousands of coins, all of which – so the regulator tells them – are equally worthless.” This encompasses both Bitcoin and all meme coins currently available, and the communication from the FCA to consumers arguably places them at significant risk of harm if they were to invest in a worthless meme coin instead of the digital asset equivalent of a blue-chip company. As governments and regulators refine their approaches to digital assets, the challenge may lie not in the speed of framework implementation but in the accuracy with which they reflect the systems they aim to regulate. As digital asset systems continue to evolve, the suitability of the “cryptoasset” category is increasingly being viewed through the lens of regulatory effectiveness rather than ideological perspectives.
