Regulation, Blacklists and Whitelists
The Weight of Decentralization Cannot be Overcome Centrally
Bitcoin started a financial revolution, but for real change to occur it must be followed by a political revolution. And there is no guarantee of political revolution. Many cryptocurrency communities outright dismiss important core values that lead to the creation of Bitcoin, such as decentralization, privacy, and open source building. These ideas are arguably the most important aspects of distributed systems, and without them the systems continue to require trust between participants and their centralized controllers. Projects like Ergo continue what Bitcoin started, but with new technologies oriented towards network scalability and longevity such as smart contracts, on-chain oracles and storage rent.
Many other projects are built on shaky foundations with little planning towards longevity and the prevention of centralization.
Rug-pulls and Regulation
If you’ve been in the crypto market for some time you know that the problem of rug pulls is widespread even amongst well known projects. For instance, the Terra network, a top 10 project at its peak and known for offering 20% to those who locked up their stablecoin UST, ended up completely collapsing and hurting many retail investors. The Solana network, currently a top 10 project by market cap, is a heavily centralized protocol known for repeatedly halting block production.
Unfortunately, the uninitiated only want to see 100x in their investment and mass adoption. They end up taking part in Ponzi schemes, transferring their wealth to a fairly centralized group of developers and early investors. Some of these projects are essentially glorified MySQL databases that are similar to those used in traditional banking, minus the regulation. These venture capitalist-backed projects are, at best, trying to become new-age banks, and at worst, massive scams. When these scams come crashing down, retail investors invariably get hurt, and like clockwork the regulators come out.
Crypto is no longer in the periphery. It still hasn’t gained widespread appeal throughout the masses due to a constant stream of negative propaganda and FUD from mainstream media, but those in charge are aware of the threat crypto poses to the status quo. Central bank digital currencies (CBDC) will finally bring us the mass adoption in blockchain technology that we want, but at what cost? A financial revolution being hijacked by those in power to further their grasp over the population.
During a panel discussion on digital currencies the current federal reserve chair J. Powell said,
It’s highly likely that digital financial activities that are currently outside the regulatory perimeter will find their way, will be brought within it, which is necessary to level the playing field, keep the trust of users, protect consumers and all that.
As we know from the incompetence of the U.S. Securities and Exchange Commission, when regulators say “consumer protection” what they mean is “consumer control.” They will not stop at moving away from traditional fiat currency plagued with inflation with CBCDs. They will strive for absolute control over digital markets. Washington already uses the Climate Crisis to attack Proof of Work protocols by pointing to the green house gas emissions associated with mining.
Traditional markets are heavily manipulated in favor of hedge funds and centralized interest. The public is not only in danger of the loss of freedom associated with CBDCs, but also the bigger looming threat of regulators bringing all digital financial activities within their control.
Blacklists
Recently we have seen addresses that have interacted with Tornado Cash, a privacy mixer for Ethereum, banned from using specific services such as AAVE. Justin Sun, the ex-CEO of TRON, was blocked by AAVE after only receiving funds from Tornado Cash.
This all occurred after the Office of Foreign Assets Control (OFAC) of the United States Department of the Treasury sanctioned Tornado Cash for allegedly assisting in money laundering.
Let’s not forget that laundering money and tax evasion have been commonplace amongst the wealthiest as seen in the Pandora, Paradise and Panama Papers. These loopholes were allowed to exist because those governing and those with wealth are deeply entwined groups. The difference with privacy dApps, like Tornado Cash, is that now the financial freedom enjoyed by the rich is open to all. National institutions use the money laundering rhetoric as the scapegoat for increasing surveillance. In reality, all we see is the absolute hypocrisy of the elite. Different rules for them; different rules for the people.
It's not that blacklists are necessarily bad. The moral value of the blacklist lies with the decision making system of choosing who is blacklisted. In some protocols, like Ethereum, the traditional centralized authorities have the ability to dictate who is good and bad—who can participate and who can’t. There is irony in applauding regulation in crypto. The ideals of crypto run against the morality of centralized regulators. People who think regulation is a good idea, think only of quick widespread adoption, and in doing so lose the entire objective of crypto, which is to build a new financial system on trustless uncensorable protocols with access to privacy.
Whitelists
The dream of large nation states would be to move from blacklisting addresses to only allowing addresses that are whitelisted to participate in the system. Nations globally are looking to launch CBDCs to surveil and control the financial realities of their populations. They will try their best to stop the mainstream use of other digital assets outside national digital ecosystems that they create. A whitelist would be a directory of addresses that are linked to a person through KYC, which will be monitored to “keep the trust of users and protect consumers.” Only these addresses would be allowed to interact with the new mainstream digital economy, and any deviant behavior would be flagged and audited.
The national interest will be to automate this process in such a way that mainstream thought is tightly controlled and outliers are dealt with accordingly under the guise of consumer protection and freedom.
The Limits of Regulation
I have written about the possibilities of how centralized power structures can, at least in theory, take control over this movement. Proof of Stake is one way, where the entrenched plutocratic class can use their existing capital to buy back control of the network. They will point to Proof of Stake being more eco-friendly, while hypocritically continuing to support the Big Oil/Gas industrial complex. Blacklists and Whitelists are other tools they can use to maintain their power. But I want to explain why this will be very difficult for them.
We should not ignore the current economic climate. The irresponsibility of American monetary policy is causing widespread defaults across countries around the world. The federal reserve is walking a tightrope, on one side a fiery hyperinflationary collapse and on the other a waterfall into cascading defaults internally causing a deflationary depression. Can we honestly say that USD can be trusted? Is it ultimately any different than the crypto shitcoins that eventually rug-pulled to zero? American soft power continues to weaken, and there are limits to how much they can use hard power moves like threats of incarciration to control the population.
Technology is driving a shift away from modern nation-based governance. Government beauracray is slow and inefficient and is only now starting to react to regulating the internet and internet-based companies.
With weakening governments, the elite will adapt and attempt to use their capital to influence the new digital economy as much as they can. Distributed protocols that have been compromised by centralized control will face the same problems as traditional systems in how value is distributed amongst participants. Centralized networks, especially when they are Proof of Stake, will tend towards traditional plutocracy with power asymmetry and wealth inequality. Protocols that are more decentralized, trustless, and have access to privacy will provide more freedom and be more advantageous to participants in the network. Centrally controlled networks will benefit the central party asymmetrically to the rest of the group, so over time the group will move towards decentralized alternatives because it is economically favorable.
At the very least, the existence of decentralized projects as alternatives to centralized projects force the latter to minimize corruption and inequality. There is the looming threat that if centralized chains result in the same asymmetry as in traditional systems, people will quickly move towards more fair decentralized protocols that are inline with their own self-interest.
Transitions in Control
Some form of control is necessary. Decentralized consensus and governance attempts to form a new control system, that minimizes coercion from centralized interests. Current national interests are those of the wealthy attempting to prevent changes in power dynamics and the status quo. Ideally, power itself will flow from our current systems to new decentralized systems and new regulations will flow out from these decentralized systems. Grassroots decentralized networks may grow at a slower rate, but the growth will be more robust.
The Ergo protocol focuses on building the technology necessary for a powerful long-term decentralized system, while growing a robust community that is ideologically sincere.
If you are interested in learning more about the Ergo Protocol check out my intro here.
Nothing in this article should be taken as financial advice. Be sure to do your own research before making any decisions.
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Ergo address: 9f4XwYAHM4WUJM4PnPBA7Va7gB7qg9tb7nwUvfcvVyehscjH1v9
Cardano address: addr1q8fwulcc64vvrnxa0zdwfw4ynk6qf7njzs39v53rpp593z6g3svmpc7m6rtnnye2n2uduc02ft2qe25v07ke58sfc64qc9axyj
Bitcoin address: bc1q3ay68jkgwgvqp8smvpdz49pc9awtdhpy9l45jz