Crypto 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 largest crypto exchanges in the world – declared bankruptcy on Friday after revelations about its business practices led to a wave of customer withdrawals, without sufficient funds to meet those withdrawals.

Coin base have no significant exposure to FTX, but I have great sympathy for all involved in the current situation. It is stressful any time there is potential for customer loss in our industry, and many people are losing a lot of money as a result of FTX’s struggles.

It is also important to be clear about why this happened – and what needs to change if we want to prevent something similar from happening again.

FTX’s downfall appears to be the result of risky, unethical business practices, including conflicts of interest between deeply intertwined entities, and decisions to lend customer funds without permission. It is worth noting that these activities also occur in traditional financial markets – and in fact, blockchain technology will make it easier to track and prosecute over time.

In the wake of this week’s events, we are already seeing calls for more regulation of the crypto industry, with tighter restrictions on access and innovation. The problem is that, so far, US regulators have refused to provide clear, sensible rules for crypto that would protect consumers.

Crypto 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 safe, transparent manner. This means that a number of crypto-based financial products, including lending, margin trading, short selling and other tools that are perfectly legal and regulated in traditional financial markets are all but banned in the US. Entrepreneurial teams building new decentralized products are afraid to build out of the US for fear of litigation. They don’t want to break the rules, and right now they don’t know what the rules are.

As a result, US consumers and sophisticated traders alike have engaged in risky offshore platforms outside the jurisdiction – and protection – of US regulators. Today, more than 95% of crypto trading activity occurs on foreign exchanges.

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

Instead of putting in place clear guidelines for crypto, US regulators have focused on regulation by enforcement – ​​going after US-based companies for not following the rules without actually establishing what those rules are. Coinbase itself fell victim to this practice earlier this year, when the SEC accused the company of listing unregistered securities, a charge we vehemently deny. It’s bad for US competitiveness, and bad for Americans who lose money when foreign firms collapse.

All of this helps explain why more heavy-handed regulation will only make the problem of crypto companies and crypto users going overseas worse. Instead, we need smarter regulation that protects consumers and makes the US a more attractive place for crypto companies to operate.

Despite the prevailing perception that crypto companies don’t want to be regulated, many – if not most – companies have been working with policymakers for years. Those of us who care about the future of crypto want to create sensible regulation for centralized exchanges and custodians in the US and other regions.

In the long term, the crypto industry has an opportunity to build a better system by using decentralized finance and self-managing wallets that do not rely on trusting third parties such as exchanges. Instead, customers will be able to rely on code and math, and everything can be publicly auditable on the blockchain. Until then, however, regulators must establish clear rules that bring crypto back to land, encourage innovation and protect consumers.

The United States has always prided itself on being at the forefront of new technologies and industries. With more than 200 million global crypto users and countries beginning to pilot digital currency programs and accepting bitcoin as legal tender, the time for crypto has arrived.

Now America has a choice: take the lead by providing clear, business-like 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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