Temple Melville

Six years ago, when Gideon Greenspan said that regulation would come to cryptocurrency, he – and others like him – were roundly condemned. No one wanted regulations; it was completely against the ethos of crypto.

Now, investors on Celsius, BlockFi, Voyager, FTX, Gemini Lend, and institutional investors using Genesis are losing a lot of money. Even Greystone – the original doyen of Bitcoin investing and one of two main options for investing through a pooled fund – is being looked at with a somewhat jaundiced view.

Suddenly, everyone realises that regulation and oversight might not be such a bad idea. Now, the questions is more about what type of regulation we should be looking for.

Let’s begin with what should be two of the more straightforward areas to tackle: stopping money-laundering and tax evasion.

First, it’s worth putting the problem in some context. According to a Chainanalysis report, cyber criminals laundered an estimated $8.6 billion in crypto during 2021. That represents a mere 1% of the $800 billion to $2 trillion thought to be laundered through fiat currencies every year.

Of course, that is not to diminish that there is wrongdoing – it is still a big number, but it merely demonstrates that to tackle the wider problem, crypto isn’t necessarily the best place to start.

Another area crypto often comes under attack for is its alleged role in financing illegal activities. What many people forget about is that every crypto transaction is traceable, which makes it ill suited for use by the people involved in these illicit endeavours – at least, if they do not want to be caught.

Finally, and perhaps most relevantly in our current context, there is the need to protect citizens and investors. In 2021, Chainanalysis figures show $14 billion was lost to crypto scams. While that is a fraction the sums lost to similar cons in the fiat world, no one should be swindled out of their money, whether through Ponzi schemes, false promises, fake prospectuses, or crooked management teams.

Crypto is also often sold as a get-rich-quick scheme, and people’s desire for riches tends to do the rest. Naturally, governments and regulators want rules that will cover what is said and promised to their citizens. In that respect, it is notable that with Lehman Brothers – the bank at the centre of the 2008 financial crisis – at the end of the day, no one lost a penny despite dire predictions.

The same is unlikely to be said about FTX, Luna, Celsius, and the other crypto platforms that have gone to the wall this year. In fact, many investors, users, and regulators are scared away by the black hole that currently exists within crypto.

That is why regulation is bullish for the sector. With regulatory clarity, there will be a boom in crypto investment as conservative investors realise they have the same protections as they would within the fiat world.

Properly encoded tax regulations will also mean that people will no longer have to worry that they are making mistakes with their tax returns. This, in turn, will enable institutions to invest in the sector – how, at the moment, can they justify making a crypto investment when even the government is not too sure about it?

The eventual adoption of regulated Crypto ETFs unlocks the door for funds and other investors to invest in crypto, making investing in crypto much easier for everyone. While crypto ETFs have been rejected by the SEC in the past, they are much more likely to be approved after concrete regulations come in, as they surely will.

To that end, there are seven areas regulation has to cover:

1. Stablecoins will have to be strictly regulated for safety and transparency, and have their backing reserves properly audited, at the very least every quarter.
2. DeFi protocols will be required to collect Know Your Customer (KYC) and Anti Money Laundering (AML) information from users and report to regulators.
3. Crypto companies – CeFi and DeFi – should be required to obtain special licenses, and their officers should be vetted and approved too. In a quirk of fate, FTX and Alameda Research were pressing for these types of companies to be heavily regulated before their implosion.
4. Centralised crypto companies should be required to keep user funds segregated from their own in the same way that fiat funds have trustees looking after the funds they manage.
5. Proper compliance and auditing requirements will be imposed on all CeFi and DeFi companies – and on company officers too.
6. Privacy-focused networks and apps should be severely restricted. They should be licensed and many existing such networks might need to be closed down and banned.
7. Despite tax laws being pretty comprehensive, it may be that new tax codes will need to be created for DeFi and crypto income and capital gains.

We should embrace regulation as its way of avoiding the calamities that have plagued the industry this year. The next 12 months will be a crucial first step on that journey, ultimately leading to the mainstream adoption and use of crypto in the global economy.