I'll start with a controversial statement: regulation and monitoring are not inherently bad things. My opinion may ruffle the feathers of many crypto enthusiasts. However, I am convinced the success of blockchain technology will require learning how to walk a trust tightrope. We must somehow strike a healthy balance between catering to individual user privacy rights and respecting communal rights to safety and fairness.
If you're skeptical of my position, consider the tremendous amount of good that regulation and monitoring can accomplish. For example, the US Department of Justice's Project Safe Childhood was able to track Bitcoin purchases to take down the Web’s biggest child abuse site. This resulted in hundreds of arrests worldwide and secured justice for thousands of minors who had been exploited in unimaginably horrific ways. If Bitcoin had been truly untraceable and anonymous, predators like Adolfo Fernandez, who acquired over 2,000 pictures and 300 videos of minors being sexually abused, would likely still be at large today. Moreover, with fully unregulated cryptocurrency exchanges, it would be impossible for governments to reclaim stolen cryptocurrency to restore to their citizens, like the US Department of Justice was able to do in February 2022 for some victims of the 2016 Bitfinex hack.
Regulation and monitoring, therefore, in my view, are desirable, necessary, and frankly, inevitable. I also believe the Internet Computer has certain advantages over other blockchains to find a workable regulatory balance that will serve the interests of both individuals and governments. Instead of keeping our focus on crime prevention though, which could be the subject of a future article, let's talk more about ICP's monetary regulation benefits for now.
Tax Advantages of Neuron Maturity
If you've been with the Internet Computer ecosystem since the Genesis launch, you may recall that rewards on the Network Nervous System used to work differently.
How NNS Rewards Used to Work
Originally, each day, the NNS would divide ICP rewards in the form of maturity amongst participating neurons according to their relative claims. These claims were calculated using voting power, determined by stake amount, age, and dissolve delay, in proportion to the number of proposals voted upon. The user could then:
- Do nothing with the maturity;
- Merge the maturity into the neuron; or
- Spawn the maturity into a new neuron.
In countries like the United States, unfortunately, not only were options (2) and (3) taxable events, but the mere reception of maturity in (1) was a taxable event. This forced many investors in the NNS to immediately spawn and sell newly accumulated maturity or else face possible undue tax burdens.
How NNS Rewards Work Now
Thankfully, in the modern NNS, maturity is an indeterministic attribute of a neuron until dissolution and distribution, dependent on several market factors that could change the resulting ICP value up to a maximum of about 10%. In other words, there is no more one-to-one correspondence between a neuron's maturity amount and a set amount of ICP.
Moreover, since the way NNS rewards work has already been changed once, the Internet Computer could change how maturity works again at any time. Indeterminism makes the mere acquisition of maturity exempt from taxation. Only the minting of new ICP at the dissolution and distribution of a neuron can be taxed in countries like the United States.
U.S. Securities and Exchange Commission Relevance
In contrast to ICP, on other blockchains, such as Ethereum and Solana, stake rewards are taxable events akin to earning interest on a bank account. Internet Computers need no longer report or pay taxes for ICP until they mint.
In other words, it doesn't hurt to accumulate "interest" on ICP during bear markets while waiting for the value of ICP to go up. Neuron maturity on the current implementation of the Internet Computer doesn't count as a defined security or property for the U.S. Securities and Exchange Commission (SEC).
How ICP Can Minimize Regulatory Risks
Other drawbacks to using blockchains like Ethereum may be right around the corner. Recently, the SEC asserted in a fraud lawsuit that it has authority over transactions on Ethereum because the majority of validation nodes are clustered in the United States. While cracking down on fraud is absolutely laudable, the far-reaching authority claimed by the SEC has vast implications for decentralization.
On the bright side, should the SEC and other similar agencies across the globe adopt a node clustering logic for exercising jurisdictional authority, the Internet Computer is ideally situated to adapt. Developers can tag canisters with geographies and jurisdictions.
For example, a developer subject to Canadian regulations could label their code “CA.” The canister would then run on Canadian subnets that obey the jurisdictional rules of Canada. This would safeguard the broader Internet Computer blockchain from regulatory overreach by any particular jurisdiction and allow local customization that respects geographic sovereignty.
Ensuring localized compliance with, for instance, the European Union's General Data Protection Regulation would be quite straightforward. And, to avoid any one country claiming unique ownership over the network, the Internet Computer could intentionally avoid clustering its nodes in countries like the United States.
Self-Regulation of the Network Nervous System
In closing, I want to talk a little about how ICP is already demonstrating self-regulation for safeguarding intellectual property through emerging network democracy. Back on December 6, 2021, you may remember that Nintendo asked a node provider to take down a Super Mario 64 emulator hosted on a canister.
The NNS was able to quickly create a new proposal type, "remove canister," which allows copyright claims to be enforced by more-or-less automated voting after verification. That kind of blockchain-wide action isn't possible on Ethereum or Solana at present.
But I think the Internet Computer's true regulatory genius, as alluded to at the beginning of this article, involves crime detection and prevention. It has to do with each individual user's unique Internet Identity, and it's not immediately obvious - but that will have to be the subject of a future article.
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