The Crypto Crackdown Has Just Begun

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There was a lot of joy online when the US Department of Justice announced the arrest of the founder of crypto exchange Bitzlatos last week. Unpronounceable, unknown, and unlike all the much bigger fish (like Binance) that make headlines, Bitzlato looked like a little fry, a nothing. The fact that Bitcoin resumed its march above $21,000 seemed to confirm this.

But that ignores the big picture. In the first weeks of 2023, the watchdogs have done a lot. On January 3, a joint statement from US banking regulators warned the industry of crypto risks seeping into the banking system. Then came a $100 million settlement with Coinbase GlobalInc. over weak internal controls, a lawsuit against the Winklevoss Gemini twins and broker Genesis for allegedly selling unregistered securities, and a $45 million settlement with lending platform Nexo (which has ceased operations in the United States). United). Summonses are pouring out.

The wheels of justice are turning slowly, the lawsuit from Gemini and Genesis came too late for the customers to fight to recover $900 million in trapped funds, but they are now picking up speed. Regulators like the SEC feel rightly vindicated by the events of the past few years, which have seen a widespread loss of confidence in crypto fail to snowball into a broader economic crisis. The collapse of FTX demonstrated the failures of the industry but also the benefits of a tough regulatory line on exchanges, such as when the SEC intervened behind the scenes in 2021 to prevent Coinbase from launching its own crypto lending product. As one official said last year, the track gets shorter for unruly rigs.

There may be a lot of debate about whether crypto tokens are more like securities, commodities, shadow banking, or gambling, but the ongoing goal is to ensure that Crypto issues do not seep into the financial system. As legislative attempts to craft crypto rules designed to prevent another Lehman Brothers moment are met with procedural delays and embarrassing revelations about the history of FTX’s intimate ties to Capitol Hill, regulators with long memories keep an active eye on banks’ crypto exposure as a gauge of real risk. Silvergate Capital Corp., already crushed by its exposure to FTX, seems to have gotten the message and reduced the value of the stablecoin assets it bought from Meta Platforms Inc. sDiemworth to nearly $200 million at the time for practically nothing.

Bitzlato’s action is part of that push, with the DOJ citing inadequate anti-money laundering checks on exchanges and substantial dealings with U.S. customers, two examples of the kind of regulatory loopholes in the system that have missed FTX red flags. Carol Van Cleef, a lawyer with a long digital asset background, sees a blueprint for future actions, including the US Treasury’s determination that Bitzlato is a major money laundering concern, making it an outcast international. It goes beyond the SEC.

The regulations have detractors. Some fear going too far; others think it’s counterproductive to try to build guardrails around digital assets rather than stepping back and letting them burn. It is true that crypto is full of activities that are more gambling than investing. And it’s somewhat depressing to see that those at the heart of last year’s crypto meltdown already have takeovers on their minds, from Three Arrows Capital to FTX.

But money laundering, fraud, market manipulation and tax evasion are not self-resolving risks. As European Central Bank Fabio Panetta has pointed out, regulators consider the costs to society of unregulated digital assets to be high and require more action. The crackdown is clearly just beginning; those wishing to dive back into crypto, even after taking a dip, should take note.

More from Bloomberg Opinion:

Cryptos Hotel California traps the Winklevoss twins: Lionel Laurent

Matt Levines Money Stuff: Crypto Banks Owe Each Other Money

Gold regains its glitter: Merryn Somerset Webb

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Lionel Laurent is a Bloomberg Opinion columnist covering digital currencies, the European Union and France. Previously, he was a reporter for Reuters and Forbes.

More stories like this are available at bloomberg.com/opinion

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