Regulators Mount Up

Regulators Mount Up

From Binance to BlockFi, from Britain to the banks, regulators are finally moving on crypto. Is that a good thing?

Regulation has always been coming for crypto. Together with Chinese Bitcoin bans and Tether FUD, regulation forms the holy trinity of the crypto bad news cycle. And like those other two, it’s always been a bark without a bite, offhand comments at some conference or insinuations that regulation is “coming soon”.

After Tesla put Bitcoin on its balance sheet earlier this year, the general feeling was that regulators may have missed their window. How do you put a trillion dollar genie back in its bottle?

But then China did actually ban Bitcoin. And now financial regulators everywhere from America to the EU, China, Thailand and the Cayman Islands (yes, apparently they do have financial regulators…) are sharpening their claws and threatening to bring order to the madcap, take-no-prisoners, sink-or-swim chaos we call crypto. Party’s over, mutha flippaz.

Binance, BlockFi and bears, oh my

It’s unsurprising that Binance has been copping most of the flack. The largest cryptocurrency exchange in the world by a massive margin, Binance serves as an avatar for the industry at large. It’s stateless, processes trillions of dollars in anonymous international transactions and offers mouthwateringly high leverage to complete schmoes like you and me. It started with the UK banning Binance’s local offshoot and soon you had regulators in close to a dozen countries announcing they were investigating the exchange.

Meanwhile in America there was Janet Yellen saying regulatory action was coming for stablecoins – the lifeblood of the crypto markets – and courts in both New Jersey and Texas ruling that BlockFi, a crypto lending platform with more than US$15 billion in user funds, needed to register as a security or shut down. The IMF is zeroing in, the SEC, CFTC and OCC is after DeFi, and the EU wants to crack down on cross-border crypto transfers. It is, in short, all happening, and it’s making crypto bears salivate at the prospect.

Carry a big stick

The attention is having an effect. Over the last two weeks Binance has cut its max leverage from 125x to 20x, banned margin trading with AUD, GBP and EUR and removed all stock tickers from its website. The derivatives exchange FTX, fresh from closing a $900 million funding round, has followed suit. Even Uniswap, the supposed paragon of uncensorable DeFi trading, announced that it was limiting trades in certain coins.

If we’re being honest here, a bit of regulation is well overdue. With high-risk derivatives trading going, I believe the kids call it, HAM over the last couple of years, the crypto market’s famous volatility had well and truly escaped Earth’s gravitational well – and retail traders were suffering.

Then there’s also the question of exchanges offering unregulated securities, the potential for click-of-a-button money laundering and the whole “creation of an anarchic alternative financial system with potentially disastrous repercussions for the economy” thing. At a certain point, self-regulation just ain’t gonna cut it.

Principle and practice

I’m not here to offer any predictions as to what effect all this attention might have – except to say that the most obvious seeming outcome is rarely the correct one – but I’m also not going to pretend I’ll be sad to see scam coins and ludicrous leverage purged from the market. And while it’s all well and good to point out that the vast majority of money laundering happens with US dollars, it’s not something you want to actively welcome into your own industry.

However, whether you see regulation as the saviour or destroyer of the crypto industry could come down to a question of philosophy. Do you believe that crypto is a fundamentally uncontrollable instrument of radical freedom that’s only as useful as its capacity to create an alternative, more democratic financial system? Or do you think it’s a disruptive new technology with immense capacity to improve the way that everyday systems work across an immense range of industries? To put it more bluntly, are you an idealist or a pragmatist?

The battle lines are being drawn. Where do you stand?

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