Cryptocurrency is transitioning from a rebellious technology to a highly regulated asset, reshaping financial markets in the process.

Written by: Vahan P. Roth

Compiled and organized by: BitpushNews

Abstract:

• Governments are shifting from suppressing cryptocurrency to accepting regulation

• New regulations enhance control but threaten privacy and decentralization

• Compliant assets and "blacklisted" tokens may diverge

Over the past decade, the cryptocurrency industry has undergone dramatic changes. It has evolved from a niche project for a group of programmers and skeptics of government and fiat currency into an asset class that is nearly mainstream. Bitcoin, once hidden on the fringes of the financial system, is now stepping into the spotlight.

Bitcoin ETFs are trading globally, pension fund managers are beginning to consider allocations to digital assets, and sovereign wealth funds are also testing the waters. This year, the U.S. federal government even established a strategic Bitcoin reserve under President Trump.

This leap from the margins to the mainstream is closely tied to a shift in regulatory thinking among governments.

The Rise of Crypto Regulation

Not long ago, the government's attitude towards cryptocurrency was primarily one of hostility and disdain. As usual, officials and regulators instinctively chose to "shut down" due to their inability to understand it. However, when they realized that they could not truly shut down decentralized networks like Bitcoin without closing the entire internet, regulatory thinking began to shift towards taxation and regulation.

Although these measures diverge from the "decentralization and freedom" that cryptocurrency advocates, they have, in reality, facilitated industry development. For many businesses and investors, regulation has brought legal certainty and predictability. Prior to this, nearly every business decision was accompanied by legal risks, making projects difficult to advance.

Switzerland was one of the first countries to clarify its regulatory stance, attracting a large number of crypto entrepreneurs and establishing a "Crypto Valley" in Zug. Here, entrepreneurs no longer have to worry about the legality of their companies or fear office raids and account freezes. As more countries follow suit, crypto companies can operate more confidently on a global scale.

The Limits of Regulation

Of course, this wave of regulation sweeping across the globe is not uniform. Some countries adopt a more lenient approach, while others are extremely harsh. In 2021, China completely banned cryptocurrency trading and related activities (though personal ownership remains legal); in contrast, the U.S. has taken the opposite approach by establishing a national strategic Bitcoin reserve and digital asset repository.

Despite the differing approaches, the trend is clear: regulation is tightening overall, directly impacting the core advantages of cryptocurrency—privacy, censorship resistance, monetary stability, and decentralization.

For example, the European Union's Markets in Crypto-Assets Regulation (MiCA) imposes significant compliance pressure on token issuers while regulating the market and protecting consumers, particularly for small, innovative startups. MiCA requires that any transaction exceeding €1,000 must be reported, whereas the U.S. banking threshold for fund reporting is $10,000. Stablecoin issuers must also keep at least 30% of customer funds in banks, which not only increases costs but also introduces banks as intermediaries, thereby increasing risk.

Today's anti-money laundering (AML) rules are also becoming increasingly rigid in practice. For instance, if an asset was previously associated with hacking activities before multiple transactions, even if the current holder purchased it legally, it may be flagged, frozen, or even confiscated.

This practice ignores an ancient legal principle: in the 1758 British case of Miller v. Race, the court ruled that a holder who unknowingly received a stolen banknote in exchange for services still retains ownership. However, today's crypto regulation often disregards this principle.

The Future of Two Crypto Markets

High Probability: Continued Regulation, Loss of Decentralized Value

If the regulatory trend continues, the original characteristics of cryptocurrency—privacy and decentralization—will be nearly extinguished. At that point, crypto assets will no longer hold advantages over traditional securities, and user accounts may be arbitrarily frozen, with assets confiscated by the government. The advantages of decentralization will also be weakened, and systemic risks will rise.

This will lead to a market split: on one side are "whitelisted assets," highly compliant and tradable through banks and brokers; on the other side are "blacklisted assets," developed by anonymous teams, focusing more on privacy and decentralization, but incompatible with the mainstream financial system, only able to circulate in peer-to-peer markets or niche platforms.

Lower Probability: Blacklisted Assets Become More Attractive

In some cases, the privacy and sovereignty of blacklisted assets may attract certain investors, leading to a premium. Especially among tech-savvy, privacy-conscious young investors, there may be a greater willingness to endure the hassles of self-custody in exchange for complete control over their assets. However, from a realistic perspective, the likelihood of this scenario occurring is not high.

More Likely: Increased Value of Compliant Assets

Historical experience shows that large inflows of capital tend to favor compliant assets. Just as the price of London gold bars remains stable while unmarked gold bars are discounted, compliant crypto assets are likely to be more favored in the future, commanding higher prices.

This will lead to a reevaluation of the entire category of crypto assets. Some tokens that prioritize privacy and security may be viewed as "junk bonds" due to non-compliance; conversely, highly centralized tokens, similar to central bank digital currencies (CBDCs), may be regarded as AAA assets due to their "stability," becoming the new favorites.

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