Opinion: The crypto ‘wild west’ needs a good sheriff
Gary Gensler, the top US securities watchdog, pulled no punches in a recent speech about cryptocurrencies. Complaining that the sector had become “the Wild West”, he asked Congress for new regulatory powers. This week, news of a daring heist underscored his point. Poly Network, a decentralised financial network, said that hackers had exploited vulnerabilities in its systems to abscond with about US$600 million ($851.8m) in digital currencies.
Up to now, regulators have taken a hands-off approach to cryptocurrencies, generally relying on the principle of “buyer beware”. The US Securities and Exchange Commission said in 2019 that bitcoin is not a security, and the UK Financial Conduct Authority does not regulate most cryptoassets directly, only derivatives based on them.
The result has been rapid growth and flourishing innovation. That is largely to the good, despite the extreme volatility. A recent Bank for International Settlements paper concluded that most crypto buyers understand what they are doing is risky. They are simply making a judgment that the long-term rewards will be worth it.
Still, it is one thing to allow freewheeling experimentation in a small, walled-off corner of the financial markets; it is an entirely different matter when that corner explodes in size. The combined market capitalisation of the top five cryptocurrencies is US$1.4 trillion and the links between crypto and the government-backed fiat currencies are rapidly expanding. Cinema chain AMC’s announcement that it plans to accept bitcoin payments may be a stunt but it is also a sign of the times.
Proper supervision is needed, and fast. Problems range from misleading promises and inadequate security to investor rip-offs and the use of cryptocurrencies to launder proceeds of crime and finance terrorism. Regulators need to get a better grip on the sector, not to strangle it but to help it mature.
The SEC can act decisively when it feels it has jurisdiction: it brought a series of cases against initial coin offerings, arguing that they were unregistered securities. Now the commission, and its counterparts, should provide clearer rules of the road, particularly for the exchanges that hold cryptocurrencies for investors and exchange digital currencies for real cash.
There must be minimum standards for security, anti-money laundering checks and disclosure. Stablecoins, which are pegged to the dollar or other currencies, need particular attention: a large one could pose a systemic risk if investors try to redeem en masse and there are not enough liquid assets to meet demand.
The sector also needs global co-ordination and standards. Rules vary widely, and some providers are in effect unsupervised. The recent clampdown on Binance saw regulators from half a dozen countries raising concerns about lax consumer protection and anti-money laundering practice. However, most also washed their hands of direct responsibility for one of the world’s largest crypto exchanges.
The Financial Action Task Force, a global watchdog, has taken a good first step with model anti-money laundering rules that more than 50 countries have already implemented. A forum for broader co-operation and standard-setting would help prevent regulatory arbitrage. Given the BIS’s interest in the subject, it could easily convene one, perhaps modelled on the Basel Committee for Banking Supervision.
The point is not to prevent investors who want to speculate in cryptocurrencies from doing so. It is to make sure that they know what they are investing in and get what they are promised.
Written by: The editorial board
© Financial Times
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