The underlying problem is a combination of risky lending, poor risk management, and dull finances. So when cryptocurrency prices plummeted, possibly due to fears of rising inflation and the possibility of a recession, some cryptocurrency companies didn’t have the capital to cushion the blow. The result has been the disappearance of billions of dollars in value, often with ordinary investors paying the price.
Cryptocurrencies like Bitcoin should be independent of any government. But we have now reached the point where stronger government regulation of the cryptocurrency industry is both necessary and inevitable. At the same time, the industry cannot simply wait for the government to take action. Cryptocurrency companies also need to try to better supervise themselves.
With stronger regulation, the Celsius situation may have turned out differently. His model essentially consisted of taking user deposits and using them for risky, illiquid investments, and users enjoyed high interest rates in exchange. Celsius essentially acted like a bank, with no regulatory protections or FDIC insurance.
“Prudential regulation, such as that applied to banks, would almost certainly have avoided many of the problems in our industry,” Caitlin Long, CEO of custody bank Cassa Bank, said in an interview. “Prudential capital requirements, investment restrictions, background checks on all executives, annual supervisory reviews – all of these things don’t apply to the cryptocurrency industry. They do apply to banks, though.”
However, this kind of regulatory review won’t come anytime soon. That’s why both venture capitalists and ordinary investors should push companies to be more transparent and accountable, requiring audits and disclosures on lending practices and capital buffers. When cryptocurrency prices were skyrocketing, few took a look at these companies’ business practices.
A clearer and more consistent regulatory framework on what companies can and cannot do, as well as which federal agency regulates which digital assets, could offer greater safeguards for ordinary investors.
Hester Peirce, a commissioner for the SEC, has long advocated greater regulatory clarity. “If we had decided that cryptocurrency lending is an area where we can involve securities laws, we could have sat down a long time ago and set some rules that made sense,” she said in an interview, speaking on a personal basis.
Instead, what is often achieved is regulation through enforcement, where companies are punished retrospectively. One of the problems with these one-time enforcement actions is that they don’t necessarily cover the entire cryptocurrency landscape.
“Not only is this not particularly fair, because sometimes executive actions come late, and sometimes it’s a question of ‘why did you go with this project instead of this project’, but also because it allows people who are really doing bad things to get lost in the mix, ”Peirce said.
These proposals are all steps in the right direction to start a serious conversation about cryptocurrency regulation. But given Washington’s other priorities, it’s unclear when the new regulations will come into effect or how they’ll look in their final form.
Smart regulation is needed, but it will not be enough. Cryptocurrency innovation is moving faster than any government’s attempt to curb it. Political negotiations can also delay the approval of the accounts. Furthermore, with each new crisis, the cryptocurrency loses more credibility. This could lead regulators to crack down harder than they otherwise would, stifling innovation in an ever-changing field. An industry that prides itself on decentralization should not rely on government to save itself.
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