Global coordination may prove the most challenging aspect of regulating crypto
When your cryptocurrency exchange is based in the Bahamas or has no headquarters at all, chances of reclaiming your money are slim.
FTX’s founder Sam Bankman-Fried transferred $10 billion of customers’ funds to Alameda Research, all the way to Hong Kong.
According to Reuters, at least $1 billion from that sum has vanished. These are the aftermath of FTX’s collapse that put front and center the need for regulation.
But instead of clearing the foggy market of crypto, the new rules could at best protect the good, while the edgier aspects will live on.
Bahamas-based FTX filed for bankruptcy on Friday after a rush of customer withdrawals earlier this week.
A rescue deal with rival exchange Binance fell through, precipitating crypto’s highest-profile collapse in recent years.
If strong regulation will follow, the likes of Binance may stand out of reach due to their so-called decentralized finance.
Since clients’ money prove to be so chancy, the obvious regulatory fix is to force crypto companies to hold customer funds in whatever form they were deposited, rather than using it to trade or make loans.
At the end of June, the EU announced that it had reached a provisional agreement on the markets in crypto-assets or MiCA.
This brings crypto-assets, crypto-assets issuers, and crypto-asset service providers under a regulatory framework for the first time.
The rulebook forces custodians to segregate clients’ crypto holdings from the firm’s assets.
Two bills introduced this year by U.S. senators also contain prohibitions against this practice, known as “co-mingling”.
The common aim is to make sure that all users’ assets are available when they want to withdraw. But there are risks in enforcing this across the board.
Firstly, the decentralized philosophy that the crypto industry was based upon may be an insurmountable step.
For example, according to the website DefiLlama, so-called Defi has over $40 billion of total value “locked”.
This is crypto-jargon for money deposited in decentralized exchanges and other services.
Security firm Chainalysis reckons almost three-quarters of stolen crypto in 2021 was taken from Defi services.
So this corner of the industry, where developers write software to facilitate automated trading and lending products typically over the ethereum blockchain, is very hard to police.
Secondly, pinning down companies based elsewhere is quite hard. In its five years of existence, Binance has clashed with regulators all over the world.
It has an affiliated American business, Binance.US, but that company is tiny relative to the parent.
In 2017, Binance registered in the Cayman Islands. In 2019, it also registered in Seychelles.
But by 2020, authorities began calling attention to the company’s lack of licenses: Malta issued a statement saying Binance is not licensed to operate there.
Malaysia followed suit, saying Binance was operating illegally in the country.
Bankman-Fried initially said the U.S. division of FTX was insulated from the problems at his Bahamas-based exchange. Still, on Friday it filed for bankruptcy alongside the wider group.
Global coordination has proved challenging on other issues like minimum corporate tax rates. Applying a common framework for crypto could prove to be a utopia.