Deloitte to regulators: Wait until mainstream adoption to consider Bitcoin regulation

A recent report by the Deloitte Center for Regulatory Strategies, entitled “Bitcoin at the crossroads,” explores why regulators should consider delaying bitcoin regulation. After going into great depth, exploring both sides of the argument, Deloitte proposes giving the digital currency "more time to develop."

Deloitte is the largest of the global "Big Four" professional services firms, by the number of professionals, and the second largest in the world by revenue. As such, reports like this one are often read by decision makers at many of the top companies around the globe. This report, specifically aimed at regulators, is part of the company’s effort to help clarify the challenges with the fledgling digital currency industry.

“Deloitte understands the perspective of companies that are adapting to new regulatory and compliance regimes. We are also working closely with government agencies to help them implement new legislation. Deloitte business professionals are helping many federal agencies in their efforts to improve business practices and work more efficiently and effectively.”
— – Deloitte

The report outlines why it is premature to regulate bitcoin, claiming that tight regulations at this time could hinder the growth of the bitcoin market, while drawing parallels to earlier examples of the internet and eCommerce.

The author presented the argument that the market may provide the best indication of how and when to regulate bitcoin. If bitcoin succeeds and reaches mainstream adoption, then regulators would have more information about how to do their job effectively, otherwise bitcoin would simply disappear, and therefore, attempts to regulate bitcoin at this stage could yield adverse effects.

“In looking to protect the public from all of the bad outcomes we might anticipate today, could policy makers and regulators end up stifling the myriad (and yet) unimaginable capabilities that could potentially change the world for the better?”
— – Deloitte

The report also cited that the bitcoin market is still very small, with a $4 billion global value, which is about 0.3% of the ~$1.36 trillion US currency physically in circulation. Bitcoin’s daily dollar transaction volume, which peaked in February, was around $57 million, or less than 1 percent of its credit card company counterparts, as measured in 2012.

“Bitcoin is receiving a remarkable amount of attention and scrutiny from policy makers and regulators all around the world – far beyond what its current scale and market impact would seem to justify. In fact, by any relevant benchmark, the value currently at risk with Bitcoin is just a drop of water in the ocean that is the financial industry.”
— – Deloitte

Mainstream adoption is a key point in the report, which claims that “individuals who have used Bitcoin are very early adopters.” According to the Technology Adoption Lifecycle, early adoption is one of the first stages. “We could be cycles away from real products that can generate true demand for Bitcoin related services from mainstream consumers,” stated the report.

Past regulatory efforts, applied to other disruptive innovations, only happened after mass adoption was reached. “Bitcoin is a long way away from the time it has typically taken for new technologies to achieve mass adoption in the past,” states the report.

Some examples in the report include the telephone, which was unregulated for 37 years. It was 35 years for airlines, 20 years for the radio, 24 years for mobile phones, and about 46 years for the Internet. By contrast, it has only been seven years since bitcoin was first introduced by Satoshi Nakamoto.

There have been many discussions about when Bitcoin will reach mainstream adoption. The World Economic Forum survey expects bitcoin to reach mainstream adoption in the year 2027. Gartner’s Hype Cycle for emerging technologies places bitcoin mass adoption in five to ten years time. Following the argument that majority adoption is years away, the implication is clear, it’s too soon to regulate bitcoin.

"Bitcoin will revolutionize the way we conduct business and think about work."
— – Max Hoblitzell, Deloitte Consulting Senior Consultant

Perhaps the most persuasive reason why it would be premature for regulators to focus on bitcoin revolves around the unrealized final form that bitcoin and blockchain technology will take. The report cited a rising number of potential use cases for bitcoin, which are getting increasingly impressive, and anticipates applications that may influence the future in a variety of ways.

“Like others before it, Bitcoin is likely to follow a path where one innovation leads to another and ultimately, the very products, services, and capabilities that were once difficult or impossible to imagine, become necessities in our daily lives.”
— – Deloitte

There is simply no way to know what Bitcoin will look like, and what it will be doing, by the time it matures, the report reasons. While further making this case, Deloitte compared bitcoin to eCommerce, which was also controversial in its infancy, and prohibited for some time.

Similar to bitcoin today, venture capital investment and startups were heavily invested in the technology behind eCommerce, well before mainstream adoption could occur. The technology had been around for almost 20 years before the National Science Foundation lifted its ban on commercial traffic over the internet, in 1991.

“Rather than holding back, the US should lead by building the information infrastructure, essential if all Americans are to gain access to this transforming technology."
— – Al Gore

eCommerce only took off with the introduction of the High-Performance Computing and Communication Act of 1991, as well as efforts from Congress to remove regulatory constraints, allowing heavy investments in the internet technology.

“Bitcoin has been described as the ‘Internet of Money’ and the US may once again be facing a similar choice to that of 1991, we can either resist or encourage the yet unknown potential of Bitcoin and the blockchain technology.”
— – Deloitte

Deloitte is not alone making the case that it is too early to regulate bitcoin. In Europe, the Commonwealth recognizes the potential of bitcoin and blockchain, and set up a “Digital Currency Working Group” to investigate regulating the digital currency, before any regulations are adopted.

In the recent central bank governors’ meeting, digital currencies were discussed, but the consensus was to wait for more information before applying any regulation. In the UK, where the government is notably pro-bitcoin, £10 million has been earmarked for investment into digital currency research, to find out the impact of regulating the digital currency before the government passes any laws.

When regulations are imposed without ensuring the right environment, companies that cannot comply are likely to leave, as demonstrated by the mass exodus of companies leaving New York following the approval of the BitLicense.

However, regulators may make the case that they should be trying to regulate bitcoin early, because unusual challenges exist in trying to regulate bitcoin, which was created to be unregulated.

“Bitcoin was consciously designed to be a truly open source digital currency and public ledger, beyond the control of any single government or company.”
— – Deloitte

Many people, both inside and outside of the bitcoin arena, agree that government intervention is sometimes not necessary. This sentiment includes government officials themselves, like presidential hopeful U.S. Senator Rand Paul: “As information becomes more widespread, maybe you need less and less government.”