Bitcoin Regulation Evolution: From Legal Ambiguity to Institutional Integration

Author(s): Scott Douglas Jacobsen

Publication (Outlet/Website): Vocal.Media

Publication Date (yyyy/mm/dd): 2026/05/02

Photo by Michael Förtsch on Unsplash

YuanJie Zhang is Co-Founder of Conflux Network, where he works at the intersection of blockchain infrastructure, digital assets, and global market development. He holds a Bachelor’s degree from Fudan University and a Master’s degree from Brandeis University. Before helping found Conflux, Zhang worked at Huatai Private Fund of Funds, UNC Endowment Management Company, and Novus on Wall Street, building experience in investments, capital markets, and business operations. His commentary has addressed stablecoins, crypto regulation, no-KYC exchanges, and Hong Kong’s role as a digital-asset hub. Outside work, he enjoys sci-fi, gaming, skiing, and, by his own description, degen culture.

In this interview, Scott Douglas Jacobsen speaks with YuanJie Zhang on Bitcoin’s transition into formal regulation. Zhang frames this as a move from tolerated ambiguity to structured institutional recognition. He explores the balance between AML enforcement and civil liberties, rising centralization through custodians, and evolving notions of financial sovereignty. The discussion highlights Hong Kong’s regulatory model, the systemic impact of stablecoins, and the tension between legitimacy, innovation, and preserving Bitcoin’s decentralized foundations.

Scott Douglas Jacobsen: How do you interpret Bitcoin’s movement from a legal gray zone into more formal statutory regulation?

YuanJie Zhang: I see it as a shift from “tolerated ambiguity” to “institutional recognition with conditions.” In its early years, Bitcoin existed largely outside clearly defined legal frameworks, with most jurisdictions responding through fragmented measures such as tax guidance, AML notices, and isolated enforcement actions rather than coherent statutory regimes. What is changing now is that Bitcoin is no longer treated merely as a regulatory anomaly or fringe experiment. It is increasingly being brought within formal legal and financial structures—through licensing, custody rules, disclosure standards, and market oversight. This does not mean Bitcoin has been fully absorbed into the traditional financial system, but it does mean it has crossed an important threshold: traditional investors who don’t have sophisticated knowledge of crypto can have access to Bitcoin investment under the watch of regulatory authorities. It’s no longer simply observed from the margins of the legal order but increasingly structured within it.

Jacobsen: Is there a shift from enforcement-driven oversight to clearer legislative frameworks?

Zhang: Yes, broadly speaking, there is a clear shift in that direction, although the pace and depth of that shift vary across jurisdictions. For a long time, crypto regulation in many markets was shaped primarily by enforcement first, rules later. Regulators often relied on investigations, sanctions, public warnings, or selective prosecutions to signal their position, leaving the industry to infer what was permissible by observing what was punished. That created a highly uncertain operating environment: market participants could often tell what was prohibited, but not what was affirmatively allowed. What we are increasingly seeing now is a transition toward a more mature model—one based on ex ante legal frameworks rather than ex post enforcement alone. Policymakers are beginning to define categories, licensing standards, disclosure obligations, reserve requirements, custody rules, and investor protections in advance. So enforcement is not disappearing; rather, it is becoming one tool within a broader legislative framework. The shift is from rule by case to rule by design. Hong Kong, as an experimental hub of crypto, is leading the policy-making process than that of mainland. To avoid unwanted enforcement encounters, crypto practitioners migrate from Mainland to Hong Kong for clearer guidelines.

Jacobsen: How should policymakers balance AML and KYC obligations with civil liberties and privacy rights?

Zhang: The right balance begins with a simple principle: policymakers should regulate concentrated points of financial risk without treating privacy itself as suspect. AML and KYC obligations are legitimate and necessary where financial intermediation takes place—at exchanges, custodians, brokers, payment providers, and stablecoin issuers. These are the points where illicit finance risks are most likely to concentrate and where oversight is most justified.

The challenge arises when that logic expands too far. If every wallet, peer-to-peer interaction, privacy-preserving tool, or open-source protocol is treated as a compliance object, regulation risks collapsing into generalized surveillance. At that point, the issue is no longer just financial crime prevention, but also civil liberties, due process, and the legitimacy of private economic activity.

A sound framework should be guided by proportionality, data minimization, procedural safeguards, and a clear distinction between regulated intermediaries and individual users. The goal should not be total visibility, but targeted accountability where genuine risk is concentrated.

Jacobsen: What are the biggest risks of concentration as Bitcoin becomes more dependent on regulated custodians?

Zhang: The greatest risk is that Bitcoin remains decentralized in theory while becoming increasingly centralized in practice. At the protocol level, Bitcoin is still open, distributed, and resistant to centralized control. But for a growing share of users, access is no longer direct—it is mediated through ETFs, regulated custodians, exchanges, brokerages, and institutional platforms. This creates a structural shift: the network may remain decentralized, while ownership, liquidity, and practical control become concentrated in a relatively small number of intermediaries.

That introduces several risks. It creates operational single points of failure, increases exposure to regulatory and political pressure, and raises the likelihood of freezes, withdrawal constraints, or systemic dependency on a handful of licensed entities. More broadly, it shifts the center of gravity away from bearer ownership and toward institutional gatekeeping.

So the real question is not whether regulated custody is inherently problematic, but whether Bitcoin’s decentralization survives only at the technical layer while its economic reality becomes increasingly centralized.

Jacobsen: How does regulatory hardening change the meaning of financial sovereignty for Bitcoin holders?

Zhang: Regulatory hardening makes financial sovereignty a much more layered and conditional concept than it was in Bitcoin’s early framing. Originally, Bitcoin sovereignty meant something very direct: you held your own keys, controlled your own assets, and could move value without needing permission from any institution. It implied not just ownership, but operational control.

Today, however, many people who “hold Bitcoin” do so through custodial accounts, exchange balances, ETFs, or other regulated products. In those cases, they may have economic exposure to Bitcoin, but not necessarily the full sovereign qualities it was designed to enable.

So the real question is no longer simply whether someone owns BTC, but which layer of control they actually possess. Do they control the keys? Can they withdraw freely? Can they transact without institutional approval? In a more heavily regulated environment, financial sovereignty increasingly depends on whether the holder retains control over the infrastructure of ownership—not merely exposure to the asset.

Jacobsen: Hong Kong is an important crypto hub. What lessons do its regulatory posture offer for other jurisdictions?

Zhang: Hong Kong offers a useful example of what it looks like to pursue a strategy of being open, but not permissive by default. Its regulatory posture shows that a jurisdiction does not need to rely on ambiguity or regulatory vacuum to attract the industry. Instead, it can build credibility through licensing, supervision, product boundaries, and policy coherence—while still positioning itself as a hub for innovation, tokenization, and next-generation financial infrastructure.

The most important lesson is that clarity is often more valuable than looseness. Markets can usually adapt to strict rules more easily than to uncertain ones. If participants understand the perimeter, the standards, and the licensing pathway, they can make long-term decisions. What undermines confidence most is not regulation itself, but inconsistency and reversals.

At the same time, Hong Kong also shows the limits of this model. If compliance costs become too high or access too narrow, innovation can still move elsewhere. Credible openness requires both order and practical usability. Under current circumstances, the trading volume of Hong Kong licensed exchanges falls far behind those of its offshore peers. And stablecoin players are yet to show their prominence.

Jacobsen: How do stablecoins, regulated rails, and growing links to Treasury markets reshape the broader crypto ecosystem?

Zhang: They are fundamentally reshaping crypto from a relatively self-contained digital asset market into a more consequential layer of global monetary and financial infrastructure. Stablecoins have evolved far beyond their original role as simple trading instruments. They now increasingly function as settlement assets, liquidity rails, collateral instruments, cross-border payment tools, and bridges between on-chain systems and real-world financial activity. As a result, they are becoming one of the main channels through which traditional finance and crypto are converging.

At the same time, the growing integration between stablecoins and U.S. Treasury markets is especially significant. As issuers hold larger reserves in short-duration sovereign debt and cash-equivalent instruments, stablecoins become more deeply embedded in the architecture of dollar liquidity. That means crypto is no longer merely adjacent to the traditional financial system—it is beginning to interface directly with the monetary plumbing that underpins it.

This deepens the role of the U.S. dollar in crypto, increases reliance on regulated financial rails, and ensures that stablecoins are increasingly treated as a matter of financial and regulatory significance—not just a crypto issue. In the meantime, it prolongs the dominance of US dollars in the world financial system allowing US dollars penetrating the corners where banks cannot reach.

Jacobsen: Do you think regulatory clarity will ultimately strengthen Bitcoin’s legitimacy and resilience?

Zhang: On balance, yes—but only if clarity does not come at the expense of Bitcoin’s core institutional meaning. The strongest case for regulatory clarity is that it reduces existential uncertainty. It makes Bitcoin easier for institutions to hold, for markets to build around, and for policymakers to engage with without defaulting to suspicion or exceptionalism. In that sense, clearer regulation can strengthen Bitcoin’s legitimacy, investability, and long-term resilience within formal economic systems.

But there is also a more subtle risk. If regulatory clarity simply means pushing Bitcoin into highly intermediated, tightly permissioned, and institutionally controlled channels, then what is being stabilized may not be Bitcoin itself, but rather the financial wrappers built around it. That distinction matters.

Bitcoin’s long-term resilience depends not only on institutional acceptance, but also on whether it can remain meaningfully open, self-custodied, and resistant to over-centralization as it scales into legitimacy. So I would put it this way: good regulation strengthens Bitcoin; over-centralized regulation strengthens Bitcoin’s institutional packaging. The real challenge is whether Bitcoin can be regulated without losing what made it historically significant in the first place.

Jacobsen: Thank you very much for the opportunity and your time, YuanJie.

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