Cryptocurrency markets need regulation to avoid FTX-type situations

Coinbase founder and CEO Brian Armstrong attends Consensus 2019 at the Hilton Midtown on May 15, 2019 in New York City.

Steven Ferdman | Getty Images

FTX, until recently one of the world’s largest cryptocurrency exchanges, declared bankruptcy on Friday after revelations about its business practices led to a spike in customer withdrawals without enough funds to fulfill those withdrawals.

Coinbase It has no financial impact on FTX, but I have a lot of sympathy for everyone involved in the current situation. Any time there is the potential for customer loss in our industry is stressful, and many people have lost a lot of money as a result of FTX’s struggles.

It is also important to clarify why this happened and what we need to change if we want to prevent something similar from happening again.

The collapse of FTX appears to be the result of risky, unethical business practices, including conflicts of interest between deeply intertwined entities and decisions to lend unauthorized client assets. It should be noted that these activities also occur in traditional financial markets – and in fact, blockchain technology will make it easier to track and trace over time.

Following the events of this week, we are already seeing calls for more regulation of the cryptocurrency industry, and tighter restrictions on access and innovation. The problem is that, until now, US regulators have refused to provide clear, sensible rules for cryptocurrencies that would protect consumers.

Cryptocurrency regulation in the US has been difficult to navigate, and regulators have so far failed to provide a workable framework for how these services can be offered in a secure and transparent manner. This means that cryptocurrency-based financial products, including lending, margin trading, short selling, and other instruments that are perfectly legal and regulated in traditional financial markets, have all been banned by Entrepreneurial groups creating decentralized products in the US. USA for fear of litigation. They don’t want to break the rules and they don’t know what the rules are right now.

As a result, American consumers and advanced traders alike are dealing with risky, offshore platforms outside the jurisdiction and protection of US regulators. Today, over 95% of cryptocurrency trading takes place on overseas exchanges.

Part of the reason FTX was able to do this was because it operates in the Bahamas, a small island nation with little regulatory oversight and ability to oversee financial services businesses. Did regulators force FTX to behave the way it did? No. But they created a situation where FTX could take dangerous risks without any repercussions.

Instead of setting clear guidelines for cryptocurrencies, US regulators have focused on regulation through enforcement – ​​going after US-based companies for not following the rules without specifying what those rules are. Coinbase itself fell victim to this practice earlier this year, when the SEC accused the company of listing unregistered securities, which we categorically deny. That’s bad for U.S. competitiveness, and bad for Americans who lose money when overseas firms collapse.

All of this helps to explain why tighter regulation would worsen the problem of crypto companies and crypto users going abroad. On the contrary, we need it smarter regulation that protects consumers and makes the US a more attractive location for cryptocurrency companies.

Despite the prevailing view that cryptocurrency companies do not want to be regulated, many, if not most, companies have been working with politicians for years. Those of us thinking about the future of cryptocurrency want to create smart regulation for centralized exchanges and custodians in the US and other regions.

In the long term, the cryptocurrency industry has the opportunity to build a better system using decentralized finance and self-protecting wallets that do not rely on third parties such as exchanges. Instead, customers will be able to trust code and math, and everything is publicly verifiable on the blockchain. Until then, however, regulators must create clear rules that bring cryptocurrency back to shore, encourage innovation and protect consumers.

The US has always prided itself on being at the forefront of new technologies and industries. With over 200 million global cryptocurrency users and countries beginning to test digital currency programs and accepting bitcoin as legal tender, the time has come for cryptocurrency.

The United States now has a choice: take the lead by providing clear, business-oriented regulation, or risk losing a key driver of innovation and economic equality.

Brian Armstrong is the CEO and co-founder of Coinbase.

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