BankThink

We can't afford to wait for government to lead crypto regulation

FTX 'Horror Stories' Abound in Crypto Exchange's Bahamas Home
Andrey Rudakov/Bloomberg

The fall of FTX was just the latest calamity to hit the crypto world — and it's caused a cascade of closures, bankruptcies and losses for individual and institutional traders, governments and companies that used crypto for financing and trading. Crypto has been down before and bounced back — but this time, the losses may be too great for trading to go back to "normal." 

The overwhelming reaction among governments and traditional financial gatekeepers has been to call for regulations on what has been a freewheeling, open trading market.

Among those calling for regulations is U.S. Treasury Secretary Janet Yellen, who "remains quite skeptical" about cryptocurrency in general. "I think everything we've lived through over the last couple of weeks, but earlier as well, says this is an industry that really needs to have adequate regulation," she said. Right now, the industry doesn't have the regulations needed to protect advisors — but plans are being formed to do just that, Yellen told reporters.

Yellen's statement was nothing new; for years governments have been saying they will regulate crypto. But they haven't done much of anything. Yellen's speech was more of the same lip service. It is time the crypto industry itself rises up to the challenge and adopts its own regulatory framework.

What's needed is a mass gathering of all those to whom the free decentralized finance system is important — platforms, miners, investment firms and even individual investors — to hash out ideas on how the industry could regulate itself. Rules need to be enforced, of course, and the gathering would have to determine who would be in charge of that enforcement. 

One idea would be to recruit top accounting and management firms — the ones that supervise and audit private and even state lotteries. Among the requirements these supervisors could impose is a proof-of-reserves rule, ensuring that cryptocurrency held or stored by an organization or platform is backed up by "tangible" assets. 

Freedom of trade — and private trading — is indeed the secret sauce of cryptocurrency, and flies in the face of creeping and increasing regulation of the economy that the gatekeepers are advocating. With that, some regulations, or at least industry standards, are needed. Steps should ensure basic rights, such as making sure that small investors aren't ripped off. And the recent events in the crypto world make it clear that some light regulation — at least to the extent of protecting investors — is needed.

Besides ensuring that accounts and platforms follow the rules that it establishes, the regulatory body will need to develop best practices and methods of dealing with stress, investor panics, and rapid changes in the value of cryptocurrencies. Part of those best practices could even include recommendations on developing advanced algorithmic trading tools that, for example, halt trade when prices burst out of a set framework, essentially shutting down trading while the market absorbs the situation and recovers.

If the industry takes this mammoth but important mission into its own hands, the regulations will not only materialize more quickly, but will also be suitable to the core ethos of crypto. Regulations that governments likely have in mind — if they ever get around to enacting them —  will likely cripple, if not outright undercut, the things that attract people to cryptocurrencies in the first place — anonymity, freedom to trade with whomever they want the way they want, and independence from the Fed-fueled boom-and-bust cycle we're all subjected to.

"Regulations" will likely convert cryptocurrencies into a "digital currency," no different than the dollar — except that it will be online, and thus even easier for the government to keep track of, no blockchain needed.

This would be a shame — because cryptocurrencies represent values that many people around the world aspire to. But if the regulations imposed on cryptocurrencies could reflect those values — ensuring that trading remains free, while protecting investors and organizations from the kinds of excesses FTX and others were guilty of — then those values could be preserved. 

The current scandal is disappointing, to say the least, and bad actors clearly need to be rooted out. Crypto advocates need to constantly make clear to potential investors that they are dealing with a high-risk and often-volatile asset; and they need to use advanced technology to ensure that their investors are protected. But we need to keep in mind that the industry is much broader than these bad actors — and that the ideas, principles and ideals that are emerging from crypto will, without question, have a huge impact on our freedoms. If we as an industry are serious about our future, we need to act now to develop a regulatory framework.

For reprint and licensing requests for this article, click here.
Regulation and compliance Cryptocurrency
MORE FROM AMERICAN BANKER