The underlying problem is a combination of risky lending, poor risk management, and opaque financing. So when cryptocurrency prices collapsed, likely out of 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, and ordinary investors often pay the price.
Cryptocurrencies like Bitcoin are supposed to be independent of any government. But we have now reached the point where strong government regulation of the cryptocurrency industry is both necessary and inevitable. At the same time, the industry cannot wait for the government to act. Cryptocurrency companies should also try to adjust themselves better.
With a stronger regulation, the centenary situation might have been done differently. Its model was basically to take users’ deposits and use them for risky and illiquid investments, users enjoying high interest rates in return. Celsius was essentially operating as a bank, without regulatory protection or FDIC insurance.
“It was almost certain that prudential regulations, such as those that apply to banks, would prevent many problems in our sector,” Caitlin Long, chief executive of depository Custodia Bank, said in an interview. “Precautionary capital requirements, investment restrictions, background checks for all executives, annual supervisory exams – all of these things do not apply to the crypto industry. However, they do apply to banks.”
However, this type of regulatory reform is not likely to come any time soon. That’s why venture capitalists and ordinary investors alike should push companies for greater transparency and accountability, and demand audits and disclosures about their lending practices and capital reserves. When cryptocurrency prices were so high, few took a closer look at the business practices of these companies.
A clearer and more consistent regulatory framework on what companies can and cannot do, as well as the federal agency that regulates digital assets, could provide greater protection for ordinary investors.
Hester Pierce, a commissioner with the Securities and Exchange Commission, has long argued for greater regulatory clarity. “If we decided that crypto lending was an area in which we could implicate securities laws, we would probably have sat down a long time ago and made some rules around that makes sense,” she said in an interview, speaking in her personal capacity. .
Instead, what you often get is regulation by enforcement, where companies are punished after the fact. One problem with one-time enforcement actions is that they do not necessarily cover the entire crypto landscape.
“Not only is this particularly unfair, because sometimes the enforcement action comes in late, and sometimes the question is ‘Why should I pursue this project instead of this project,’ but also because it allows people who do bad things to get lost in the shuffle, Pierce said.
These suggestions are all steps in the right direction to start a serious conversation about crypto regulation. But given Washington’s other priorities, it’s unclear when the new regulations will take effect or what they will look like in their final form.
Smart regulation is necessary, but it will not be sufficient. Cryptocurrency innovation is moving faster than any government is trying to rein it in. Political negotiations can also delay the passage of bills. Moreover, with each new crisis, the cryptocurrency loses more credibility. This could lead to regulators taking more drastic action than they would otherwise, stifling innovation in a field that is still developing. An industry that prides itself on decentralization should not rely on government to save itself.