The underlying problem is a combination of risky lending, poor risk management and opaque finances. When crypto prices plummeted, likely due to fears of rising inflation and the possibility of a recession, some crypto companies didn’t have the capital to cushion the blow. The result has been the disappearance of billions of dollars in value, often with ordinary investors paying the price.
Cryptocurrencies like Bitcoin are said to be independent of governments. But we have now reached the point where greater government regulation of the crypto industry is both necessary and inevitable. At the same time, the industry cannot wait for the government to act. Crypto companies must also try to better monitor themselves.
If there had been more regulation, the Celsius situation might have developed differently. Essentially, his model was to take user deposits and use them for risky and illiquid investments, and users in turn benefited from high interest rates. Celsius essentially functioned as a bank, without the regulatory protections or FDIC insurance.
“Regulatory regulation like the one that applies to banks would almost certainly have prevented many of the problems in our sector,” Caitlin Long, CEO of custodian Custodia Bank, said in an interview. “Regulatory capital requirements, investment restrictions, background checks on all executives, annual regulatory reviews — none of these things apply to the crypto industry. However, they apply to banks.”
That sort of regulatory overhaul isn’t likely to come anytime soon, however. For this reason, venture capitalists and ordinary investors alike should urge companies to be more transparent and accountable, demanding audits and disclosures about lending practices and capital reserves. When crypto prices were sky-high, few took a close look at the business practices of these companies.
A clearer and more consistent regulatory framework about what companies can and cannot do, as well as which federal agency regulates which digital assets, could provide better protection for ordinary investors.
Hester Peirce, Commissioner at the SEC, has long advocated more regulatory clarity. “If we had decided that crypto lending was an area to bring securities laws into, we could have sat down and worked out some sensible rules for it a long time ago,” she said in an interview in her personal capacity.
Instead, what often happens is regulation through enforcement, with companies being penalized after the fact. One of the problems with these one-off enforcement actions is that they don’t necessarily cover the entire crypto landscape.
“Not only is that not particularly fair because sometimes enforcement action comes late and sometimes it’s a question of why did you pursue this project instead of this project, but also because it allows people who are doing really bad things to get in the mix.” lost,” said Peirce.
These proposals are all steps in the right direction to start a serious conversation about crypto regulation. But given other priorities in Washington, it’s unclear when new regulations will come into effect or what they will look like in their final form.
Smart regulation is necessary, but it will not be enough. Crypto innovation is moving faster than any government’s attempt to contain it. Political negotiations can also delay the passage of bills. In addition, the cryptocurrency loses more credibility with each new crisis. This could lead to regulators cracking down more than they otherwise would and stifling innovation in a still-evolving field. An industry that prides itself on being decentralized shouldn’t rely on the government to protect it from itself.