Author | Andrew Isaak, Baris Istipliler, Suleika Bort, Michael Woywode
Source | Organization Science
This study analyzes Bitcoin data from 49 countries between 2011 and 2023, revealing an counterintuitive finding: while the legalization of Bitcoin can promote the establishment of trading platforms, in countries that declare it illegal, trading volume actually increased by more than 130%. The research finds that the decentralized and anonymous characteristics of Bitcoin render traditional regulatory logic ineffective. Large-scale corruption undermines the positive effects of legalization, while reinforcing the surge in transactions that comes with illegality. Small-scale corruption acts as a "lubricant" in environments of large-scale corruption, helping entrepreneurs navigate bureaucratic obstacles. Interestingly, decentralized Bitcoin actually relies on centralized trading platforms for its development, with 92.3% of transactions occurring on centralized exchanges. This study suggests that simple bans may backfire. Governments need more nuanced tiered regulatory strategies, entrepreneurs should choose markets that are legalized and institutionally sound, and investors need to understand the deep impact of institutional environments on markets. This research provides an important empirical basis for understanding the interaction between decentralized organizations and traditional institutional environments. The Institute of Financial Technology at Renmin University of China (WeChat ID: ruc_fintech) has compiled the core parts of the research.
1. What is a Decentralized Autonomous Organization?
Imagine an organization without a CEO, headquarters, or board of directors, yet capable of coordinating millions of people globally, handling trillions of dollars in transactions, and operating stably for over a decade. This is the reality of Bitcoin as the first decentralized autonomous organization (DAO).
DAOs operate on blockchain technology, executing decisions automatically through pre-written code. All transactions are recorded on a public, transparent, and tamper-proof ledger. Thousands of nodes worldwide maintain the network, allowing it to function even if some nodes are shut down. The total supply of Bitcoin is capped at 21 million coins, gradually released through "mining."
As of October 2024, Bitcoin's market capitalization reached $1.34 trillion, accounting for 54.92% of the cryptocurrency market. However, it has been controversial from the start, seen as both a pioneer of financial innovation and criticized as a tool for money laundering and crime. Governments around the world have vastly different attitudes—legalized in the U.S. and Japan, banned in China and India, while South Africa and Italy exist in a gray area.
2. The Dilemma and Challenges of Regulation
The Huge Divergence in Global Regulation
Japan became the first country to officially recognize Bitcoin as a legal payment method in 2017. However, China has prohibited financial institutions from participating in Bitcoin trading since 2013, and India implemented a ban in 2018 (which was lifted in 2020). This regulatory fragmentation provides a "natural experiment" opportunity for research.
The Ineffectiveness of Traditional Regulatory Frameworks
Governments face unprecedented challenges. The Bitcoin network consists of thousands of nodes worldwide, and even if a country shuts down all nodes within its borders, the network continues to operate. There is no headquarters to shut down, no CEO to arrest. While every transaction on the blockchain is publicly traceable, the true identities of participants are protected by cryptography, making it extremely difficult to trace back to specific individuals.
The co-founder of Localbitcoins stated, "In this type of business, the key is always regulation." He mentioned the motivations of traders: "Of course, there is profit-seeking, but there is also ideological drive. Some people want to make cryptocurrency more mainstream."
3. The Two Faces of Corruption
The study finds that to understand how corruption affects Bitcoin, it is essential to distinguish between two forms:
Large-scale Corruption: Occurs at the top of power structures, involving high-level officials abusing power to create policies for specific interest groups. It is large in scale and amount but infrequent, with systemic impacts.
Small-scale Corruption: Occurs at the bureaucratic level, involving civil servants who deal directly with the public. A "speed-up fee" can expedite the approval of permits, occurring frequently and involving small amounts, seen as a "lubricant" to get the rigid machine moving.
There are four key differences between the two: scale and frequency, legal regulation, enforcement intensity, and cultural attitudes. Large-scale corruption is explicitly condemned, while small-scale corruption has a morally ambiguous status and is even viewed as "social niceties" in some cultures.
When there is severe large-scale corruption, even if Bitcoin is declared legal, entrepreneurs do not trust this decision, as policies may change at any time for special interests. Data shows that for every 2.5-point increase in large-scale corruption, the platform growth brought by legalization decreases by about one.
Conversely, while small-scale corruption is also a systemic flaw, it provides ordinary entrepreneurs with operational space. In countries where both large-scale and small-scale corruption are severe, entrepreneurs have found ways to survive in the cracks.
4. Four Core Findings
Finding One: Legalization Promotes Platform Creation
When a country officially declares Bitcoin legal, the number of trading platforms significantly increases, averaging about 7 more. Legalization eliminates the greatest uncertainty for entrepreneurs, banks are willing to provide services, lawyers can consult with confidence, and all supporting services are in place. Countries like Singapore, the UK, the US, and Hong Kong, which legalized early, average over 10 trading platforms.
Finding Two: Bans Actually Drive Transactions
The most counterintuitive finding: in countries that declare Bitcoin illegal, trading volume actually increases by more than 130%. Countries like Venezuela, Vietnam, and Nigeria, which have implemented bans, rank among the highest in global trading volume.
There are three mechanisms behind this. First is the psychological "forbidden fruit effect"—when people feel their freedom is threatened, they desire the banned item even more. Second is the ideological drive—early adopters distrust traditional finance and view Bitcoin as a tool of resistance; government bans confirm its subversive nature. Third is the technical characteristic—Bitcoin's anonymity makes bans difficult to enforce, and tracking specific individuals is extremely costly.
Finding Three: The Divisive Effect of Large-scale Corruption
Large-scale corruption exhibits a divisive characteristic regarding regulatory effects. In cases of legalization, countries with severe large-scale corruption find it difficult to gain the trust of entrepreneurs even if they declare it legal. When the large-scale corruption index exceeds 20 points (including nearly 80% of sample countries), the platform growth effect of legalization is essentially negated.
However, in the context of illegality, large-scale corruption produces the opposite effect. In countries with an average level of large-scale corruption (about 40 points), if Bitcoin is illegal, for every 1-point increase in corruption, individual trading volume increases by 30%. When a corrupt government declares an activity illegal, the public questions the legitimacy of the ban: "You corrupt officials don’t even follow the rules, why should we?"
There is evidence that in some countries that declare Bitcoin illegal, the government itself is secretly holding or trading it. For example, China prohibits domestic trading but reportedly controls about 21% of the global mining market. When this hypocrisy is exposed, the moral foundation of the ban collapses.
Finding Four: The Lubricating Effect of Small-scale Corruption
In countries with an average level of large-scale corruption where Bitcoin is legalized, for every 1-point increase in small-scale corruption, it can offset about 1 platform's negative impact caused by large-scale corruption. In an institutional environment already distorted by large-scale corruption, small-scale corruption provides a certain degree of flexibility.
When entrepreneurs face complex licensing procedures and vague regulatory requirements, some "flexible handling" makes things easier. This is akin to "oiling the wheels"—the bureaucratic machine is inherently rigid and inefficient, and small-scale corruption provides the lubricant to at least keep the machine barely moving.
In countries with severe large-scale corruption where Bitcoin is banned, small-scale corruption further drives up trading volume. Grassroots officials responsible for enforcing the ban, if accustomed to small-scale rent-seeking, may turn a blind eye to prohibited transactions. Data shows that for every 1-point increase in small-scale corruption, individual trading volume increases by about 30%.
5. The Paradox of Centralization and Decentralization
This study finds that the development of Bitcoin as a decentralized organization actually relies heavily on centralized trading platforms.
In theory, anyone can obtain Bitcoin through "mining." However, in reality, the computational power required for a single Bitcoin transaction is equivalent to a household's electricity consumption for a month. To mine effectively, one needs to invest in expensive equipment and bear huge electricity costs (in some countries, the cost of mining one Bitcoin can reach $245,000). This is completely unrealistic for the average person.
Thus, for the vast majority, entering the Bitcoin world is through trading platforms—purchasing Bitcoin with fiat currency. Most of these platforms are centralized, with clear corporate entities that must comply with the laws of their respective countries. Data shows that 92.3% of Bitcoin transactions occur on centralized exchanges.
This is the paradox—while the idea of Bitcoin is decentralization and resistance to censorship, its growth relies on centralized platforms that can be regulated and shut down. These platforms are the bridge for Bitcoin to reach the public, but they are also its greatest vulnerability.
The collapse of MtGox serves as a warning. In 2013, this exchange handled 70% of global Bitcoin transactions, but in 2014 it suddenly went bankrupt, with 850,000 Bitcoins disappearing. The collapse of FTX in 2022 also shocked the world, as the exchange, once valued at $32 billion, collapsed within days due to the misappropriation of customer funds.
Decentralized exchanges (DEX) are indeed developing, but as of now, they only account for about 7.7% of total trading volume, facing challenges such as slow transaction speeds, poor user experience, and insufficient liquidity.
6. Practical Implications
For Policymakers:
Data indicates that simply declaring Bitcoin illegal cannot stop transactions and may even stimulate growth. Instead of a blanket ban, tiered management is preferable: strictly regulate trading platforms, maintain tolerance for ordinary individuals holding Bitcoin, and enhance monitoring of suspicious large transactions.
In environments with severe corruption, both legalization and illegality will significantly diminish effectiveness. Before introducing any new regulatory policy, the first question should be: does our institutional environment have enough credibility to support this policy? Anti-corruption and regulatory innovation need to be advanced in parallel.
Although Bitcoin is decentralized, trading platforms are centralized, meaning they can be regulated. Rather than viewing all activities as threats, it is better to see compliant platforms as regulatory levers and partners.
For Entrepreneurs:
Establishing trading platforms in legalized countries has a much higher probability of success. Countries like Singapore, Switzerland, the UK, and Japan not only have clear legal statuses but also mature regulatory frameworks. Although compliance costs may be high, this is a more robust choice in the long run.
In countries with ambiguous regulations or where businesses are nominally legal but severely corrupt, caution is necessary. Large-scale corruption can create uncertainty even for businesses that are legally recognized on paper. Unless there are deep political and business connections, the risks are extremely high.
Even in regulatory-friendly countries, the cryptocurrency industry remains volatile. It is essential to build a strong compliance team that can quickly adapt to policy changes. Diversifying market layouts can spread risks; do not bet all resources on one country.
For Investors:
As traders, it is important to choose based on risk preferences and resource conditions. If seeking safety and convenience, opt for licensed large platforms in legalized countries. If privacy and autonomy are more important, peer-to-peer trading or decentralized exchanges may better meet those needs.
Many Bitcoin holders are motivated not purely by economic factors but also by distrust of traditional finance and alignment with the ideals of decentralization. It is crucial to be aware of one's motivations and avoid letting emotions drive decisions. A common pitfall is "confirmation bias"—selectively focusing on information that supports one's views while ignoring negative news.
When choosing a platform, do not only consider transaction fees and the number of cryptocurrencies offered; also pay attention to security records, regulatory compliance, transparency, and risk control mechanisms. Do not place all assets on one platform; for cryptocurrencies held long-term, transferring them to a hardware wallet under your control is safer.
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