Starting with “Same Business, Same Risks, Thus Same Rules”
I. Same Business, Different Structure, Thus Different Risks
Both cryptocurrency and stock trading are forms of trading, which might make them appear to be the same business and thus carry same risks. However, they are fundamentally different. While both require the same factors for trading—matching transactions, brokers, settlement, banks, and users—their structures are entirely different.
Using Hong Kong users as example to explain five components in stock market:
Users deposit money in a bank, which is transferred to the broker’s account with a Hong Kong bank. The broker is the securities company, where the user has an account. Brokers cannot move the user’s money. Funds transferred by the securities company can only go to specific user accounts; they cannot be misdirected.
The securities company is responsible for placing orders and has a seat at the stock exchange.
The stock exchange matches orders from various securities companies. The exchange can see all orders but cannot trade for its own account.
The central clearance company handles settlement between the exchange and the securities companies.
The securities company settles with clients internally, including their assets and funds.
These steps serve as checks and balances against each other, with only the bank able to move the securities company’s funds. Aside from the securities company, the other three factors cannot touch the funds in the securities company’s bank account.
The stock exchange ensures fair trading, following rules to manage the market.
The Securities and Futures Commission (SFC) supervises and checks for any market violations.
The Five Factors Composing the Centralized Cryptocurrency Exchange:
The centralized crypto exchange (“CEX”) itself possesses the securities company, central settlement, bank, and client. Clients only need to open an account with the CEX.
There are no checks and balances among these five factors.
The CEX has KYC and anti-money laundering responsibilities, whereas in the stock market, these responsibilities lie with banks.
The CEX can see all orders and act as a dealer, betting against clients, which is not allowed in stock markets.
The CEX can move client funds since it also acts as a bank.
The CEX decides on coin listings without revealing the rules for listing approvals. As an example, Binance does not require sponsors or legal advisors for coin listings.
The CEX has no responsibility for managing its ecosystem.
Regulatory oversight in the crypto market is fragmented and lacks uniform regulatory rules. Current laws only provide for superficial supervision of CEXs.
Attempts to Simplify Cryptocurrency Trading:
Cryptocurrencies have affirmed one concept: personal data sovereignty, meaning individuals control their own money, akin to having a bank in one’s hands. The Chainless platform adheres to this principle. Users, exchanges, and the Chainless platform lock funds or coins through smart contracts. The Chainless market maker places orders on exchanges, acting as a broker. After the transaction, the Chainless platform unlocks the contract and transfers coins or funds to the user. Users do not need to open accounts at exchanges to trade, similar to exchanging tokens within a wallet. Current crypto wallets lack order placing functionalities, but wallet order placements can solve user asset security issues during transactions. Chainless will integrate with different exchanges as mini-programs on the Chainless platform, allowing users to trade on many exchanges without leaving their homes, similar to WeChat mini-programs.
Users act as banks in this process, bearing KYC and anti-money laundering responsibilities. Chainless has KYC real-name authentication during registration, but it only verifies identity online. Due to artificial intelligence, fake identities can appear real, making identity verification less reliable compared to bank’s face-to-face verification. This is a flaw. Only long-term KYT (Know Your Transaction) can detect fake identities. Another method involves authoritative agencies providing verification interfaces for the Chainless system to confirm users’ real identities.
Anti-money laundering responsibilities may still rely on banks. This is why the Chainless platform cannot directly accept fiat currency. Chainless requires banks and fiat payment tools as anti-money laundering interfaces, which should be mini-programs on the Chainless platform. In the future, users can use these banks to monitor their fund flows, with banks providing fund certificates to ensure legal sources of fund and secure credit. This will be the future business model for banks, as they will no longer be able to rely on deposits but on their ability to serve clients and their credit advantages.
Incidentally, there are decentralized cryptocurrency exchanges (DEXs) that accept fiat currency and are growing rapidly, indicating high market demand. If Hong Kong banks allow fiat and cryptocurrency transactions, it would drive new business growth for banks.
How to Regulate the Chainless Platform?
The Chainless platform’s ledger and transaction records are as transparent as Bitcoin’s, with hash values recorded on the Bitcoin chain. Every transaction is transparent and suitable for KYT tracking by anybody. The transparency makes regulation possible at any time and any place.
How to protect privacy with transparency?
The article on “the differences in privacy protection among Chainless, Ethereum and Bitcoin” mentions how an open and transparent Chainless system protects privacy:
The Chainless system supports four coin transfer modes: ID account transfer, phone number transfer, email transfer, and contract transfer.
When users transfer to their own contract accounts, there are no transfer fees. Contract accounts can be external, dispersing total ledger assets and preventing unauthorized access by hackers due to mistakes in authorization. Contract accounts are separate from main ID accounts. Flexible contract designs eliminate the inconvenience of using two driving modes in one account.
Email transfers are anonymous, not exposing total assets.
Phone number transfers are real-name transfers, not exposing total assets.
ID account transfers, like Bitcoin and Ethereum, reveal your total assets upon one transfer. The Chainless system has no personnel and ledger handling personnel, resulting in less data spread compared to banks and slightly better privacy protection. Without using ID transfers, the Chainless system’s privacy protection surpasses Bitcoin and Ethereum, while maintaining the same public ledger transparency as Bitcoin’s.
It must be pointed out that the Chainless system cannot achieve the level of privacy protection described in Bitcoin’s white paper.
Chainless platform users can choose to publicize ID accounts when public knowledge is required in real-world scenarios.
Additionally, the Chainless system supports on-chain transfers, meaning it supports anonymity. On-chain, all cryptocurrency drawbacks exist.
The Chainless system supports anonymous registration and transfers, but some Chainless payment and transaction mini-programs do not support anonymity, with some requiring real names and KYC.
Even with transparent ledgers, the above designs do not affect privacy protection.
The Chainless platform fulfils settlement and brokerage, but its transparency surpasses brokers, allowing regulatory agencies to monitor comprehensively around the clock.
How to Regulate Centralized Crypto Exchanges?
Current cryptocurrency exchanges differ structurally from stock exchanges, as analyzed earlier. The current regulatory framework cannot supervise them effectively. A global regulatory body is unlikely to emerge in the short term, so users must choose safer exchanges themselves. The core principle of blockchain is transparency, so new security mechanisms must make transaction records transparent like Bitcoin. This is transparent centralization. Using transparency to reform centralized projects also reduces regulatory costs.
Exchanges need transparent ledgers, which is a consensus in the crypto community. DeFi emerged for this purpose and is transparent. DeFi’s lack of success is due to ledger structure and usability issues. Transaction speed and usability do not even reach Web1 levels. When decentralized exchanges reach the speed of centralized exchanges, trading will thrive. HYPE (Hyperliquid) is an example of such an exchange. Launched in December 2023, it has reached a market value of $7 billion, ranking 24th in the cryptocurrency market, surpassing most DeFi projects, and trailing Uniswap (21st) by only $700 million. If exchanges adopt transparent centralized structures and hash transaction records on-chain, accessible to everyone, it will foster competitive alternatives. The reason these exchanges cannot compete with centralized ones is usability deficiencies and compliance issues. HYPE is apparently overvalued but demonstrates the power of transparency.
Regulating exchanges involves defining their responsibilities. Exchanges manage their ecosystems, including clear listing conditions, similar to requirements for the Hong Kong Stock Exchange. Exchanges are responsible for fair trading, managing all parties according to rules, and maintaining their ecosystems. Meeting these requirements allows regulatory bodies to monitor comprehensively around the clock.
How to Regulate DeFi?
Earlier, we discussed DeFi’s advantages; it already possesses transparency. Its flaw lies in compliance issues. HYPE allows direct purchases with USD—who is responsible for anti-money laundering? Additionally, DeFi needs regulatory oversight with regard to its controlling entities fulfilling ecosystem management responsibilities, including listing conditions, fraud prevention, etc. Controlling entities are responsible for fair trading, and managing their exchange ecosystem according to rules. Regulatory agencies can thus monitor comprehensively around the clock.
II. What Are the Principles of Regulation
Regulating Cryptocurrency Beyond Industrial Age Frameworks
Cryptocurrency is a human innovation, similar to stocks but with unique characteristics. For example, you can’t use stocks to buy things, but you can use Bitcoin. It is a commodity, but not an ordinary one, akin to special commodities that require regulation. Currency falls under financial regulation. Managing cryptocurrency with any single agency—whether commodities, stocks, or finance—would be inadequate. Bitcoin does not need regulation; the ultimate goal of cryptocurrency regulation is to be regulation-free. The methods discussed above leverage cryptocurrency’s characteristics to provide comprehensive, low-cost, and minimal-condition regulation around the clock.
Two Effective Regulatory Principles
In “Problems with Cryptocurrency Regulation Part 3“, detailed explanations are provided on regulating based on transparency and fiat currency interfaces. Regulatory authorities should support enterprises that meet transparency and improved interface methods in their policies. This allows internal competition within cryptocurrencies, making transparent exchanges the natural choice for users.
III. Supplementary Regulatory Mechanisms
Cryptocurrency Needs Credibility
The stock market has a mature sponsor and exchange review system. Despite this, the Growth Enterprise Market Index in Hong Kong frequently hits new lows. These systems are good references, with the most important improvement being accountability—whoever sponsors is responsible. Fraud entails joint civil and criminal liability.
Fully Utilize the Community
In the stock market, project teams and shareholders are disconnected, with annual or quarterly reports being the norm. This method is outdated, belonging to the industrial era. The internet brings all relevant parties together, with each cryptocurrency having its own community. Current cryptocurrencies have this need but lack a universal, user-friendly community software. To address this, Chainless developed the universal community software “SimiTalk”, aiding project transparency.
Establish a No-Threshold Regulatory Discussion Community
Cryptocurrency features small core teams and large peripheral teams. Communities replace company operating mechanisms. As a regulatory body for cryptocurrencies, it is essential to go with the flow and engage with community participants on equal terms. Regulatory agencies need to shift from industrial thinking to integrating into the internet era. If this concept is not clearly understood, please refer to my series of articles on the topic of “What is the Internet Era“.
IV. Leveraging Mainland China’s Population Advantage for Pilot Programs
Capital Dominated the Industrial Era; Population Dominates the Internet Era
In the internet era, people are the most valuable asset, and Mainland China’s large population is its greatest advantage. Mainland Chinese can open accounts at Hong Kong banks to directly purchase tokens. When Mainland China acts, it acts swiftly. “Be bolder and move faster”—with the U.S. ahead and Mainland China behind, if there are no special policies to attract crypto talent, how long can Hong Kong’s reserves of fiscal surplus last?
Changing Talent Attraction Conditions to Compete for Crypto’s Most Valuable Human Resources
Cryptocurrency is an emerging industry, initially involving marginal individuals whose educational qualifications do not meet immigration requirements. Efforts to attract talent to crypto enterprises must be intensified, with companies knowing the talent they need. A low-threshold entry method with continuous screening can be used. Diplomas are of little use in cryptocurrency. Elon Musk and Vitalik Buterin both dropped out of school. Cryptocurrency is an applied technology with rapid development, and fresh knowledge is at the forefront, relying on practical work rather than deep theoretical knowledge. Learning outdated concepts is less useful than having an open mind. The innovations in cryptocurrency over 15 years surpass thousands of years of human financial experiments, valuable regardless of success or failure. Bitcoin talent is selected through community practice.
V. Development is the Hard Truth
Current regulation prioritizes avoiding incidents, primarily to protect officials’ positions. Only a few tokens are allowed to trade, and new tokens must be listed on two indices, which is absurd. Directly listing cryptocurrency ETFs eliminates the need to approve crypto exchanges.
Cryptocurrencies are listed early, which is very different from the mature listing of stocks and inherently carries significant risks. Casinos also have high risks, so why are they allowed to operate? Risk is a choice by users; they accept the consequences of their bets. The focus should be on ensuring casinos do not cheat, rather than making decisions for consumers. Selecting tokens is the responsibility of exchanges, not regulatory agencies.
Having approved a bunch of exchanges—who can make money? Regulators can disregard costs, but businesses cannot. The internet’s Web1 was originally created for equality, but Web2 reverted to the centralized hierarchical thinking of the industrial era. Web3’s greatest value lies in its ideology. Applying industrial-era thinking and methods to regulate cryptocurrencies is the easiest approach; this is what we see in Hong Kong’s regulatory approach, which has not been embraced by the industry. Is the industry wrong, or is the regulation wrong?
Cryptocurrencies are born for the new era, and young people can easily understand and accept them. The incoming U.S. government, led by a team primarily composed of people born in the 1980s, has set a competitive stance on the world stage. The most innovative aspect is the U.S. Department of Government Efficiency (“DOGE”), introducing new checks and balances. This approach aligns with the spirit of the internet and cryptocurrencies. Elon Musk intuitively understands transparency and community, using internet and cryptocurrency thinking to challenge industrial thinking. The wheels of time are rolling forward, and conventional remnants will eventually perish.
The harm of not developing is greater than that of corrupt officials. Development is the hard truth!
