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Allan C. Hutchinson is a distinguished research professor at Osgoode Hall Law School.

The cryptocurrency world has recently been shaken by several seismic interventions. Facebook has promised to launch a cryptocurrency in a year or so; commercial banks are scaling up their own offerings; central banks, including Canada’s, are taking seriously the idea of making an entry into the cryptocurrency world; and the G7’s Financial Action Task Force is putting into play regulatory initiatives.

As such, the days of an unregulated crypto market are numbered. Some will rejoice at this prospect; its use for money laundering, terrorist financing and tax evasion is a problem in need of a serious solution. Others will be horrified at the encroachment of government and big banks in their efforts to reclaim control of the financial sector. Either way, cryptocurrency is in line for a make-or-break shakeup.

The responsibility for this state of affairs lies with both the crypto world and the established order.

Whatever the initial ambitions of Satoshi Nakamoto and his fellow bitcoin developers, crypto users and speculators refused to see the regulatory writing on the wall. With a combustible mix of greed and naiveté, they put their heads in the digital cloud and simply hoped against hope that the day of regulatory reckoning would not come.

The tendency at an institutional level has been to largely ignore cryptocurrency’s rise; regulation has been sporadic and marginal. Presumably, the sense was that cryptocurrency would be a passing fad and would collapse under the weight of its own hyped expectations. Some, such as Paul Krugman, predicted it would be another bubble that would soon burst. However, that complacency is being challenged.

In his semi-annual address to the House of Representatives financial services committee, U.S. Federal Reserve chairman Jerome Powell concluded that the existing rules and regulations do not suit digital currencies: “It’s something that doesn’t fit neatly or easily within our regulatory scheme, but it does have potentially systemic scale.”

But a variety of players, national and international, are getting serious about regulation. Emulating the stiff rules and penalties of banking and financial sector regulation, restrictions that go to the very heart of cryptocurrency’s appeal and raison d’être are coming. In particular, the prized pseudo-anonymity that bitcoin and other non-permissioned systems offer is being curtailed. Intrusive and onerous disclosure and reporting provisions will be implemented and enforced.

So, through a willful combination of romantic laissez-faireism on the cryptos’ part and heavy-handed intervention on the part of the state, the government and the crypto sector are locked in an unnecessary all-or-nothing battle: Cryptocurrency will continue in its original, pristine form or it will be legislated beyond recognition. The choice seems stark.

But it need not be that way. With some common sense and a willingness to compromise, cryptocurrency can move forward and play an important, if marginal, role in banking and finance. Some regulation is inevitable and demanded, but that regulation need not throw out the crypto baby with the dirty financial bath water. There is room for traditional systems and crypto upstarts to co-exist.

A large part of the answer lies, as the Federal Reserve chair intimated, in establishing an agency with exclusive responsibility for regulating cryptocurrencies. This could be an entity that resides on the border between the public and private sectors, a quasi-autonomous non-governmental organization – a so-called QUANGO.

With members from across the board, it would be tasked with the same challenge for all regulatory agencies: to regulate the targeted activity so that, after regulation, it is a better and more secure version of itself, not a different and worse one. The style and substance of legal regulation must adapt to cryptocurrency as much as cryptocurrency must adjust to regulatory interventions.

Apart from imposing licensing, disclosure and auditing requirements on cryptocurrency exchanges, the crucial role of software programmers might be tackled. It might be possible to nudge these digital guardians to write code that incorporates the values and incentives that would best advance the goals of a more fairly and lightly regulated cryptocurrency world. Mr. Nakamoto’s heirs might act in the benevolent spirit of its originating genius.

These code makers could be incentivized to alter the operating software so that the identities of coin holders would still not be available to other users but would be retrievable and storable in a separate and secure register by the crypto agency. Conditions and constraints can be put into place that preserve the limited confidentiality of such a data store; it might be judicially administered so as to balance and protect individual rights.

Facebook has taken some tentative steps in this direction with its proposed Libra coin; an arm’s-length foundation will govern its operation. But more can and should be done. Cryptocurrency can survive, and be stronger, only if trade-offs are accepted and compromises are made. No longer “secret,” cryptocoins can at least be a secure and genuine alternative to the mainstream.

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