The inventor of Ethereum, Vitalik Buterin, weighed in on the debate around crypto regulations and offered his most “controversial” opinions. Across social media, this debate is gaining traction with the participation of prominent personalities in the crypto space. 

Vitalik Buterin classified regulations as attempting to influence crypto internally and externally. The former of these approaches is “much worse” for crypto because it tries to “intrude” into crypto companies and projects. 

The U.S. Securities and Exchange Commission (SEC) is taking this approach. Under Gary Gensler’s leadership, the regulator has been applying a “regulation by enforcement,” according to the Blockchain Association. The SEC is trying to classify almost every cryptocurrency as a security. 

If the SEC prevails in its attempts, crypto companies might need to follow the current U.S. regulations, facing significant hurdles for innovations. On the SEC’s approach, the Blockchain Association recently said:

(…) The SEC must follow the law, they cannot impose their draconian view on the entire crypto ecosystem through an enforcement action.

Vitalik Buterin Breakdown Crypto Regulation

The inventor of Ethereum, Vitalik Buterin, continued classifying crypto regulation according to their ultimate goal. These objectives are to allegedly protect consumers and prevent bad actors from committing money laundering. 

Much of the crypto regulation debate focuses on decentralized finance (DeFi) protocols and their permissionless nature. Regulators and government agents claim that these platforms allowed bad actors to avoid traditional payment rails, enabling them to commit money launder and other illicit activities. 

However, Vitalik Buterin believes these risks are not “concentrated in DeFi” but on centralized crypto companies, such as exchange platforms. These entities must implement Know Your Customer (KYC) and anti-money laundering policies to prevent illegal activities.

In that sense, they are regulated and follow the ultimate objectives: they protect their customers and mitigate illegal practices. In that sense, Vitali Buterin proposed a regulatory framework that could be more beneficial to DeFi protocols. 

Regs on defi frontends that *could* be more helpful may include:

(i) limits on leverage
(ii) requiring transparency about what audits, FV or other security checks were done on contract code
(iii) usage gated by knowledge-based tests instead of plutocratic net-worth minimum rules

— vitalik.eth (@VitalikButerin) October 30, 2022 

No KYC Regulation, No Institutions

In that sense, Vitalik Buterin thinks implementing KYC rules on DeFi protocols might challenge regulations’ two primary purposes. They would force users out of the protocols while doing nothing against bad actors. The inventor of Ethereum explained: 

Hackers write custom code to interact with contracts already. Exchanges are clearly a much more sensible place to do the KYC, and that’s happening already.

This “controversial” opinion was well-received by crypto industry leaders, including Changpeng Zhao, CEO of Binance, and Sam Bankman-Fried, CEO of FTX. The latter received backlash for his own take on crypto regulations. 

Amongst his other “controversial” opinions, Buterin named institutional capital. These funds shouldn’t be “enthusiastically” pursued until the nascent sector matures. 

Another maybe-controversial take of mine is that I don’t think we should be enthusiastically pursuing large institutional capital at full speed. I’m actually kinda happy a lot of the ETFs are getting delayed. The ecosystem needs time to mature before we get even more attention.

— vitalik.eth (@VitalikButerin) October 30, 2022