The past month has seen heavy regulatory crackdowns on the crypto industry in most regions of the globe – from today’s news the U.S. Securities and Exchange Commission has warned Coinbase it may sue the exchange over its lending product, to bitcoin miners in China, to the Senate Banking Committee hearing, to the FCA blacklisting Binance in the UK. This is no surprise to anyone familiar with the financial landscape and its regulatory oversight.
Crypto regulation has been a long time in the making and is nowhere near what it should be. In retrospect, this is partly the fault of the crypto industry itself. There are a few points that we, in the crypto industry, have failed to grasp.
Back in the early 2000s, internet and mobile communications disrupted the exchange of data by democratizing access to information. Now, the next step is the disruption of the exchange of value by democratizing access to capital. This disruption found its root two decades ago with online payment systems such as PayPal and opened the door to digital banks and their consequential disruption of retail banking. It is continuing today with blockchain and artificial intelligence (AI) and should have a similar effect on investment banking and wealth management. But this is where the similarities stop.
While we in the crypto industry have a tendency to liken the blockchain and crypto revolution to the internet’s historical development, there is one crucial difference we’ve failed to grasp: The internet did its disrupting in a regulatory vacuum. It has taken governments nearly two decades to begin regulating the Big Data industry. This stretch of lax oversight enabled developers to create, evolve and innovate at a tremendous rate.
On the flip side, finance - including banking, investments and payments services - is heavily regulated, even more so since the 2008 global financial crisis. In the U.S., for example, credit activities are up to three times more regulated than the health care industry. Therefore, it is simply wishful thinking on behalf of some crypto actors to believe they could reach mainstream adoption without hindrance.
If we want crypto to not only thrive but survive, it is essential for the industry to first recognize the current failures in its ecosystems and be at the forefront of the regulatory conversation.
Some would say it is unfair for an industry as young as crypto to take on the burden of regulations that even Tier One investment banks find hard to follow. Indeed, it would be disastrous for the industry if it were required to abide by the likes of “market abuse” regulations like MAR/MiFID II in the European Union or the Dodd-Frank Law in the U.S.
I was a trader at a major U.S. investment bank in London, JPMorgan, until mid-2018, and I recall the years and cost that it took us to implement MAR/MiFId. Knowing how hard it was and still is – just last year, JPMorgan’s precious metals trading desk was accused of spoofing and ended up paying nearly $1 billion in fines – for the behemoths of finance to get it right, it seems severe to ask a young industry built mainly of startups, small enterprises and individuals to implement such compliance processes.
However, it is our duty to look at current regulations and initiate the conversation with regulators on how we can apply their laws’ spirit rather than their letter. In the end, both the crypto industry and regulators both want to protect investors and ensure market integrity.
This is why it is crucial for the industry to centralize its effort in one self-regulatory representative body from people and protocols that have a real stake in the industry, have a real understanding of the industry and have a vested long-term interest in promoting the mass adoption of crypto.
The recent Senate hearings in the U.S. laid bare what many of us already know; our industry and the actors within it are misunderstood. Regulators and governments worldwide must understand that the fintech and crypto industries are necessary for the long-term creation and distribution of wealth. In order to ensure that crypto plays as positive a role as possible in this endeavor, however, it must mature.
There are many ways the industry can improve accountability, transparency and investor protection, and there is now a chance for active players to take the mantle, rather than act as passive watchers while regulators and governments around the world have crypto under the spotlight. The industry must centralize its efforts to self-regulate, educate and protect the prospects of, ironically, the decentralized industry itself. The stakes are high but the industry can, and must, rise to the challenge.