The regulation of cryptocurrencies: from disintermediation to reintermediation

14 Jan 2015 by Andy Yee on Cryptocurrency

Disclosure statement: The author is an employee of Google, writing in his personal capacity. Google offers services in the Bitcoin market. Google further supports HIIG, the publisher of Internet Policy Review, with a substantial grant.

The rise of cryptocurrencies like Bitcoin have raised new challenges to regulation and government control. One key concern is disintermediation. It is often postulated that the open and decentralised nature of cryptocurrencies will lead to the elimination of intermediaries, and with it the government’s ability to regulate the network. Brito, Shadab and Castillo (2014) argue that a peer-to-peer system like Bitcoin can “eliminate intermediaries without eliminating the underlying conduct”. In their “Declaration of Bitcoin’s Independence”, crypto-libertarians proclaim that “Bitcoin does not pander to power structures, it undermines them” (Vigna, 2014). In a world with no intermediaries but only scattered users, information will be costly to control.


In this respect, cryptocurrencies extend the line of cyber-libertarianism thinking tracing back to John Perry Barlow’s 1996 “Declaration of the Independence of Cyberspace”. But later developments of the internet have proved the opposite - intermediaries are needed to perform certain economic and social functions, and they can be controlled. In the early days of the commercial internet, Bailey and Bakos (1997) show that while some roles of traditional intermediaries are diminished in electronic markets, new roles for intermediaries have emerged, the most important of which include aggregating information goods, providing trust relationships, and ensuring the integrity of the market. As Goldsmith and Wu (2006, p. 70) note, “the rise of networking did not eliminate intermediaries, but rather changed who they are. It created a whole host of new intermediaries”.

Therefore, a salient characteristic of the internet is that it inserts intermediaries into communications and transactions between third parties. Targeting of intermediaries provides an effective way for government to regulate a decentralised network. Previous scholars have built on Lawrence Lessig’s “code is law” premise that the architecture of the internet is a powerful way of controlling online behaviour. As Goldsmith and Wu (2006, p. 72) argue, “when government practises control through code, it is practising a commonplace form of intermediary control”. Zittrain (2006) catalogs how intermediaries serve as obvious and appropriate targets of regulation for governments seeking to control the flow of online information.


Cryptocurrencies are equivalent to the internet in two important respects. First, cryptocurrencies are information networks. In the monetary economics literature, money assumes a technological role, acting as a mnemonic device for economic exchange (Kocherlakota, 1996). Martin (2014) further points out that coins and notes, as physically distributed information-bearing tokens, are the original “Internet of Things”. Providing the ability to exchange digital tokens and write to a public ledger, cryptocurrencies are a practical application of this mnemonic theory of money. Second, cryptocurrencies are “generative”. Like the internet, they are protocols on which new financial applications can be built. Because they are open and programmable, the resulting ideas, standards and softwares will allow what Vint Cerf calls “permissionless innovation”, or what Hal Varian calls “combinatorial innovation”. These similarities lead some practitioners to term cryptocurrencies as the “internet of value”, complementing today’s “internet of knowledge” (Lashinsky, 2014).

Given cryptocurrencies’ resemblances to the internet, they will follow a similar developmental trajectory of intermediation. By nature, information networks are two-sided markets, which necessitate the formation of intermediaries that supply both sides of the market. This is made more important by the fact that intermediaries are required to overcome existing network effects and switching costs from incumbent monies, even if cryptocurrencies are vastly superior (Luther, 2013). Cryptocurrencies’ open nature guarantees that this process of new intermediary formation will be dynamic and competitive, but in the end, network effects and economies of scale will lead to consolidation and centralisation. Again, practitioners have pointed out the numerous parallels between the birth of the knowledge internet and the current developments of the value internet, predicting the “federation” of the latter (Thomas, 2014).

Now cryptocurrencies are in the quiet phase of reintermediation: the initial inventions (internet, cryptography and block chain) have been made, but they are yet to be fully incorporated into mass social and commercial practices. Over time, intermediaries will be formed under market forces to achieve this.


Indeed, Böhme, Christin, Edelman and Moore (2014) have shown that there is de facto centralisation among a small number of intermediaries at various levels of the Bitcoin innovation ecosystem. They include currency exchanges, digital wallet services, mixers, mining pools, and payment processors. This is economic and network logic at work. As Mallard, Méadel and Musiani (2014) underline, varying levels of engagement, technical knowledge and resources at disposal will take shape even in decentralised networks in which all peers are created equal. Structurally speaking, trust will gravitate towards nodes that are more important in the network.

This process of intermediation will provide ample possibility of regulatory oversight. These new intermediaries can be subject to traditional strategies of intermediary control. The decentralised file sharing movement in the early 2000s (Goldsmith and Wu, 2006, pp. 105-125) demonstrated the ultimate power of regulators. Many believed that file sharing, by introducing a zero-cost method of distributing content, would upend the copyright system. The fate of Kazaa, an intermediary that played a big role, proved the opposite. Because of Kazaa’s organisational attempts to avoid government regulation, the lawsuits against it made it a risky and unstable platform, thus preventing it from becoming a mainstream and legitimate business. It is clear that intermediaries have limited choices: they either comply with government regulations to build public trust, or become a haven for fringe users and stay marginalised.

Now a centralised cryptocurrency space will facilitate government control, but it needs to be balanced with considerations for online innovations and business ventures. Cryptocurrencies represent the merging of the financial and software industries, and will bring creative destruction to the highly insulated financial sector. Regulatory choices will shape how fast this transformation unfolds. Many recent innovators and entrants are internet intermediaries, free of legacies inherited by banks and better at radical, rather than incremental, innovations. On the other hand, they lack specific financial and regulatory expertise. In this context, the task for regulators is much broader than the prudential regulation of the existing institutional landscape. It should be about harnessing technology to better serve the real economy. There is no need for regulators to worry about the loss of control. The big question is whether they can create a forward-looking regime that maintains adequate oversight of new players while allowing innovations to flourish.


Bailey, J. and Bakos, Y. (1997). An Exploratory Study of the Emerging Role of Electronic Intermediaries. International Journal of Electronic Commerce, 1 (3), 7-20.

Böhme, R., Christin, N., Edelman, B., and Moore, T. (2014). Bitcoin. Harvard Business School, Working Paper 15-015.

Brito, J., Shadab, H., and Castillo, A. (2014). Bitcoin Financial Regulation: Securities, Derivatives, Prediction Markets & Gambling. Columbia Science and Technology Law Review, forthcoming.

Goldsmith, J. and Wu, T. (2006). Who Controls the Internet? Illusions of a Borderless World. Oxford University Press.

Kocherlakota, N. (1996). Money is Memory. Federal Reserve Bank of Minneapolis, Research Department Staff Report 218.

Lashinsky, A. (2014). Isn’t one Internet enough? Fortune. Retrieved from

Luther, W. (2013). Cryptocurrencies, Network Effects, and Switching Costs. Mercatus Working Paper, No. 13-17.

Mallard, A., Méadel, C., and Musiani, F. (2014). The Paradoxes of Distributed Trust: Peer-to-Peer Architecture and User Confidence in Bitcoin. Journal of Peer Production, Issue 4.

Martin, F. (2014). Bitcoin Is Pointless as a Currency, But It Could Change the World Anyway. Wired. Retrieved from

Thomas, S. (2014). The Internet’s Missing Link. TechCrunch. Retrieved from

Vigna, P. (2014). BitBeat: Bitcoin Bulls Get a Buying Opp; Bitcoin Anarchists Declare Their Independence. The Wall Street Journal. Retrieved from

Zittrain, J. (2006). A History of Online Gatekeeping. Harvard Journal of Law & Technology, 19 (2), 253-298.


1 Comment

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Francesca Musiani

15 January, 2015 - 12:16

Thank you for this article that gives me a lot of food for thought (and for reading) to prolonge the reflection started in the article you cite. Indeed, re-intermediation not only ends up happening, but it is an entry door for regulators. It is also one of the structuring dynamics for the evolution of markets. I have recently started working on re-intermediation in the galaxy of Internet users' contributions on recommendation and advice websites, and it is indeed impressive to witness the extent to which the supposedly infinite, open and 'raw' variety of these contributions becomes 'something else' due to the work of intermediaries, towards standardization, aggregation, 'visibility'... A topic that is likely to stay central for scholars of the Internet in its variety of forms.

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