| Hi Everyone,
Yesterday, my colleague Mati Greenspan argued against government intervention in crypto, particularly in light of the recent events around Terra Luna/UST. His comments are valid, and I am not disputing his claims nor advocating for regulation. However, I can’t see a continued path for digital assets that doesn't include regulators, particularly in the United States.
The total market cap for crypto this morning was $1.31 trillion, having lost almost $1 trillion in value since the beginning of this year. However, while the market cap has gone down, the 24-hour volume has increased from $84 billion on the first trading day of 2022, to $91 billion yesterday.
While large, the nascent market still dwarfs in comparison to U.S. equities which were valued at over $48 trillion at the end of Q1 2022.
So the question is, can the industry continue without more comprehensive regulation?
Regulation has been in the crosshairs of the crypto community since Satoshi Nakomoto’s paper was first released in 2008. The events of the past week highlighted the risk to the markets, and social media was full of individuals lamenting over losing college funds and house payments.
The U.S. equity markets have been regulated by the Securities and Exchange Commission since 1934, initially founded to restore investor confidence following the Great Depression. Meanwhile, the derivatives markets are regulated by the Commodity Futures Trading Commission, which in addition to equity derivatives, provides oversight to crypto derivative contracts, which have seen a general upwards trend in volume over the last few years.
Yet the ever-growing crypto community—bitcoin, altcoins, stablecoins (and NFTs, although I am not including them in this discussion)—lacks a mature regulatory framework. But isn't having no central authority the main reasoning behind crypto?
Did Satoshi envision what the market would evolve into when he first penned his paper? Did he foresee over 10,000 altcoins with billions of dollars in daily trading volume? And why is regulation needed? Well, let’s take a look at what happened with Coinbase last week.
In the firm’s quarterly filing with the SEC, Coinbase stated that in the event of a bankruptcy, "the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings." Coinbase users would become "general unsecured creditors," which, in a bankruptcy, come behind secured creditors but ahead of shareholders.
So how does this translate into the industry needing regulation? Currently, investors' cryptocurrency losses are not protected by the Securities Investor Protection Corporation, which protects broker-dealers against losses of cash and securities.
While all this may cause eye-rolling, consider this—the general public finding out that their funds are not guaranteed at one of the most popular crypto exchanges might put a dent in further retail adoption.
Would an “official” risk disclosure have stopped investors from pouring money into terraUSD? We’ll never know for sure.
What we do know is that crypto is now fully in the view of policymakers and regulators, and now they have an example of a money-losing investment that investors thought was safe.
But who will the regulators be?
Regardless of which government organizations regulate the crypto industry, they need to develop a framework that not just allows, but encourages innovation.
Blockchain and distributed ledger technology are increasingly becoming part of the traditional financial sector, and the lines between these spaces are blurring. But safeguards are needed in order for mainstream adoption to occur.
I appreciate all your likes, follows and comments! As always, thank you for reading.
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