By Maxim Galash
Regulation is something that most industries work hard to avoid or minimize. However, for the crypto economy, regulation represents salvation.
The need for rules is more urgent than ever. Segments of the crypto economy are becoming too big to fail, putting investors and whole financial systems at risk. The $40 billion of the TerraUSD and its linked Luna token provided a taste of this, wiping out life savings and sparking a broader cratering of crypto prices. Coinbase is slashing 1,000 jobs amid a drastic trading slowdown, and Celsius has halted withdrawals.
The risks are growing, though most regulators aren’t putting them at the top of their to-do lists. That’s a mistake. The total value of stablecoins pegged to the dollar now stands at around $170 billion, representing a significant threat to financial stability. Even after the recent dump, the total crypto market stands at $968 billion— up from $200 billion at the start of 2020.
Financial regulation always evolves after collective pain sparks public pressure for protection. The 2008 financial crisis, for example, led to the Dodd-Frank Act, the Emergency Economic Stabilization Act, and a series of steps by the Federal Reserve, all aimed at creating stability and preventing risky behavior. The hope is that we won’t need a similar systemic collapse to drive real change for crypto and that regulators and lawmakers can get ahead of the curve.
Indeed, we’re seeing early stabs at legislation after the recent tumult. Two U.S. senators have proposed a new Responsible Financial Innovation Act and Britain has floated changing existing rules to help regulators manage the possible collapse of some stablecoin firms.
More needs to be done.
Players in the industry need to realize that regulation is essential for the continued adoption of crypto. Disasters like Terra-Luna and others before it have reinforced the view from Main Street that crypto is a scary place, full of scams, bad actors, and massive risks.
Companies throughout the space should be engaging with authorities and welcoming legal frameworks that help bring crypto into the mainstream.
4 Steps for Responsible Oversight
There are four steps that would represent a good start — classifying assets, bolstering consumer protection, and regulating stablecoins.
A lack of clarity over how authorities view and treat different digital assets is holding crypto back. The absence of regulation in the U.S. and most other countries means there are few clear answers on what different protocols and platforms need to do to gain legitimacy, and how investors should treat the 20,000 or so crypto tokens for tax purposes. A huge question hanging over the industry is whether most tokens meet the definition of a security, and are therefore subject to tougher reporting and registration rules. Hopes that the lawsuit brought by the SEC against crypto company Ripple on this issue would provide a quick answer have been dashed as the case drags on.
1. Clarity from Lawmakers
Regulators could put other tokens in the buckets of currencies or commodities, enabling investors, issuers, and exchanges to treat them accordingly. Until we get this clarity from lawmakers, crypto adoption and positive financial innovations will be held back by confusion over tokens’ legal and tax status.
2. Consumer protection
Consumer protection is another pillar of regulation that remains largely absent for crypto investors. Anyone in the world can create a token, market it, and sell it, without having to fulfill any regulatory requirements or face clear legal consequences for wrongdoing. U.S. crypto exchanges were giving customers access to UST and Luna right up to their collapse.
Regulation wouldn’t prevent everyone from being exposed to shady projects. There’s always a way to buy coins using VPNs and foreign-based exchanges. But by holding domestic exchanges to account, authorities could have prevented losses suffered by many thousands of investors.
3. Understanding the Risks
Regulations need to strike a balance between protecting vulnerable consumers and allowing freedom of access to wealth-creating opportunities in crypto. Restricting participation in yield-earning to wealthy accredited investors, as some U.S. platforms have begun to do, is unfairly restrictive. A better idea may be to require customers to pass a financial literacy test before they are allowed to invest.
4. Stablecoins
The other top priority for regulators should be to ensure the stability of stablecoins such as Tether and USDC. These coins tied to the dollar play a crucial role because they are widely used in trading pairs and are an on-off ramp between crypto and fiat. Ensuring these providers are regularly audited to ensure they can meet their commitments and that holders have some protection — similar to the FDIC guarantee on bank deposits — will go a long way toward reducing crypto risks. The UK’s proposal following the UST collapse for new rules to manage the failure of stablecoins was a step in the right direction on this front.
A few jurisdictions, such as Dubai and Singapore, have shown it’s possible to develop regulations that strike a balance between managing the risks of crypto and giving a legal framework in which to flourish.
In essence, U.S. regulators and lawmakers should follow suit; the U.S. crypto sector can only benefit.
About the Author: Maxim Galash
Maxim Galash is the CEO of Coinchange. He is a serial entrepreneur, investor, and adviser with over ten years of experience building technology companies in FinTech, Blockchain and IT services. Max is currently CEO of the fast-growing DeFi platform CoinChange Financials, and a board member at Wattum.io.
You May Also Like…
Millennial Investors and the Great Wealth Transfer
Adding Cryptocurrency to Your Portfolio
Ask the Hammer: Should I Invest in Cryptocurrency If It’s Offered in My 401(k)?
Be the first to comment