Aug 26, 2022 3 min read Crypto

The window is closing for crypto regulation

The crypto market is now mature enough to speculate on its eventual outcome. Here are some possible summary statements. The story of crypto may look like something like this:

A) This hot technology came onto the scene a few years ago, but had many thieves in it, and by the time it was regulated it was obsolete.

B) This hot technology came onto the scene a few years ago, and after some struggles was regulated and integrated into the larger financial market, which adapted to the newer technologies.

C) This hot technology came onto the scene a few years ago, and after some struggles dominated innovative technologies and the traditional financial markets.

There are many permutations of these outcomes, of course. And the reader may have entirely different ones. But these propositions allow us to focus on two key attributes of the crypto market. First, regulation of the market is an international bruhaha. Second, competing technologies are here to challenge blockchain and cryptocurrency. These competing technologies, including quantum computing, do not need to be fully developed to be a challenge for cryptocurrency. “Little Boy,” the first atomic bomb, was developed years ahead of the hydrogen bomb. There may be a “Little Boy” being developed for crypto now.

Where are we in crypto regulation?

The current crypto winter with its enormous financial losses in the cryptocurrency markets has led to widespread investor losses. For many, the numerous misfeasance and malfeasances in the market have resolved the question of whether the cryptocurrency market should be regulated.

The EU has been a leader in regulatory efforts and like other jurisdictions has attempted to draft legislation that respected the need to advance technology. Licensing crypto institutions has been described as essential. In the US efforts to regulate crypto have been active but continue to face pushback against tight government regulations.

On this blog, I have previously dealt with the key issues in Federal regulation of cryptocurrency. Federal issues in crypto regulation have been dealt with in earlier entries in this series. American crypto rules are in limbo which is holding up the global consensus process. That holdup, however, has not stopped bank regulators and others from acting to regulate crypto interactions with banks.

In the end, the delay in crypto regulation exposes investors to a market in a regulatory grey area. While this is not desirable, it may be necessary because crypto regulation, indeed all financial regulation, must address the technical challenges of recent technologies.

Can crypto really survive a quantum “Little Boy”?

There are a variety of emerging technologies that are theoretical competitors to cryptocurrency and blockchain applications. The primary one, however, is quantum computing. Classical computers use bits, which can be zero or one. This is our everyday computer chip. Most quantum computers use bits, qubits to be exact, which can be both zero and one at any particular time. The technologies are evolving along several lines but exploit properties of quantum mechanics. This is the same area of physics that led to the atomic bomb.

The primary issue of quantum computers with crypto is the ability of quantum computers to break crypto keys. These keys protect encrypted data of all types but are especially important for blockchain keys. Governments and industries around the world are well aware of the urgency of the problem and are developing new types of quantum secure keys.

This is proving especially difficult. If securing a network is a quantum challenge, then decentralized networks like crypto may well be impossible to protect.

The time when quantum computers would be able to crack the financial codes of the world is unknown but generally measured in years or at most decades. But the time to full commercialization of quantum computers is not particularly relevant for cybersecurity.

One of the first atomic bombs was code-named “Little Boy.” This bomb was developed years ahead of a fully deployed nuclear capability after WWII. The same should be expected to occur now with quantum computing. Foreign state actors should be expected to be actively engaged in developing one or more quantum computers whose sole function will be to crack crypto codes and steal from cryptocurrency exchanges.

Regulatory efforts on the quantum security front are being developed. These efforts should be merged with the cryptocurrency regulations—and soon. Or else, crypto regulations will be overseeing an obsolete technology, blockchain, and a dead market, crypto.