Amid Scary Crypto Winter, US Regulators Must Turn Up The Heat

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The crypto industry is mismanaged, but that’s no big surprise. Unfortunately, the “crypto winter” predicted for this year will continue to cool unless major players mitigate risks, policymakers provide clearer guidance, and regulators begin to adjust their policies. application strategies.

Before discussing the solutions to this predicament, let’s start with an introduction to the crypto winter and the shady practices happening in the crypto space. Since the start of the pandemic, the crypto industry has seen a Wild West-level gold rush explosion that was expected to lead to capped growth.

The previous crypto winter began in 2018, with the market stagnating or even negative for almost three years, so investors are rightly concerned that their expectations for a continued recovery are highly unrealistic.

Equally concerning is the collapse of the FTX cryptocurrency exchange, founded by Sam Bankman-Fried (SBF). The House Financial Services Committee held a hearing Dec. 13 into SBF’s arrest on charges of money laundering and conspiracy to commit wire and securities fraud.

Crypto is not living its finest hour. In addition to the collapse of FTX, Celsius and Voyager (two major crypto companies) declared bankruptcy, and investors and consumers suffered huge losses. All of the cases happened not because of the technology itself, but because people used the hype of technology to cover up mismanagement, possibly even crimes. For example, what caused the collapse of FTX appears to be just old-fashioned fraud; it has almost nothing to do with cryptocurrencies or blockchain.

So what to do to prevent this from happening again?

Several industry bigwigs, investors, academics and legal professionals have suggested enacting new laws. However, we need to stop ignoring the application of current laws and regulations (such as fiduciary duties under existing corporate law) and start being aware of the potential negative impacts of hasty regulatory and legislative responses.

The thing is, major players in the blockchain and crypto industries seem to have circumvented the existing rules. For example, US companies are required to act in good faith, disclose any potential conflicts of interest, and keep records of their financial and accounting documentation, but many crypto companies apparently have failed to do so.

Some crypto companies issue securities, and since many cryptocurrencies are commodities, companies should have complied with securities law and commodity exchange law. Other companies have intentionally registered their companies overseas to avoid money laundering and know-your-customer rules, while having a business presence in the United States.

Hard and fast regulation will not solve the problem either. Lawmakers shouldn’t create new regulations just because industry wants them — at least not without doing enough cost-benefit analysis and impact assessment.

There are several ways to regulate the crypto industry. One is to regulate crypto as a “new asset class,” like the European Union Crypto-Asset Regulatory Framework (known as MiCA), and formulate rules around it- this. Additionally, self-regulatory bodies (which wield some degree of authority over various industries) should also formulate the rules for crypto industry participants to follow.

Specifically, there should be adequate licensing rules regarding who can acquire licenses to run crypto businesses. Beyond that, there should be strong client asset segregation rules, proof of reserves rules, investor warning models, clear corporate structures, sophisticated risk management mechanisms , records of on-chain and off-chain assets and transactions, and rules on bundling multiple services.

In addition, there needs to be more collaboration in rule-making, not only at the national level, but also at the international level, between regulators and legislators. Much of what has happened in the crypto industry is because US regulators have limited jurisdiction over offshore crypto companies, but these companies still have an economic impact on territories and citizens. Americans. There is definitely a lesson to be learned here.

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The Wild West ultimately didn’t stay wild, and neither did the current crypto chaos.

How regulators will deal with the outlaws remains to be seen, but – for the sake of investors and consumers – let’s hope their solutions are as smart as they are quick.

Jiaying Jiang, SJD is an assistant professor of law at the Levin College of Law at the University of Florida. His research focuses on policies and regulations regarding emerging technologies, including artificial intelligence, fintech, blockchain, cryptocurrencies, and central bank digital currencies.

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