Crypto currencies and assets may be about to enter the big league in a couple of years or maybe half a decade.
It is foreseeable at this point that they could maybe reach $10 trillion, making them a market of a size that can not be ignored.
But mums and Paps are not here yet, generally speaking. The crypto market instead is mostly young, probably mainly 30 to 45, a demographic that can afford risk and should take risk according to general financial advice.
That may change indirectly with sons handling mums’ investments through crypto, and even in the absence of that, naturally one wants to make the space safer.
Regulations in some areas therefore are not just inevitable, but desirable, because the Chancellery courts have been established by the independent judiciary over centuries for very good reasons.
Fiduciary relationships, duty of care, trust, are all fine concepts when someone else is holding the assets for you.
In crypto we do have methods where the network holds the assets and the assets can still ‘act.’ In these instances, the Chancellery court does not apply because the assets are not being held by a third party, but by the actual owner.
These area should remain unregulated. That’s defi, smart contracts, self-custody wallets, miners, even NFTs and whatever else is developed that in nature has the code itself as the custodian.
When humans are the custodian however, a very delicate balance needs to be struck especially in a fast growing industry that is in a ruthless flux.
A Question of Timing
The main argument against regulations is that it kills competition. There is only one crypto exchange in the United States, Coinbase, and Gemini which is hardly used, and you can add Kraken too in a duopoly.
That’s primarily because even at this point the costs of setting up a regulated crypto exchange – and crypto exchanges are heavily regulated – are almost prohibitive.
The barrier for crypto was also natural in as far it is very difficult to secure. The temptation to fractional reserve is also clearly too high, and so trust in new exchanges is almost non-existent until they prove themself to some extent.
That’s unfortunate because we take it as a given that competition benefits the public. European regulators therefore have set up sandboxes to lax the regulatory rules, but Bitstamp seems to have never quite recovered from the one hack they had five years ago, and neither has Bitfinex even though both have since operated somewhat fine.
The other danger of regulations is the false sense of security. FTX claimed, and rightly, that they are heavily regulated, and even boasted they’re the most regulated crypto exchange. No regulations however can protect from outright theft, except prison arguably.
And the third fragility of regulations is their rigidity which can have significant unintended consequences especially if one is mistaken in certain requirements, which can and does happen as afterall regulations are by fallible humans.
Still, there have to be measures to ensure – even if that measure is prison – that one is not tempted to be negligent, reckless, or worse, with other people’s money.
When it comes to exchanges the Securities and Exchanges Commission (SEC) argues those measures should be the same as for NYSE.
In fact, according to the current chair Gary Gensler, that’s a pre-requisite for SEC to allow a spot bitcoin ETF.
The problem with that is the entrance of a new exchange to the market would be even more impossible unless it is by the current traditional finance grandees.
This is not just undesirable on a competition front, but also dangerous on a security front because the ultimate protection against thefts and hacks is to diversify, to hold your coins in quite a few different exchanges as a trader.
The crypto market therefore is one where competition is not just a luxury or a theoretical benefit, but an absolute necessity.
The SEC framework therefore can not apply unmodified because cryptos have specific additional requirements, especially in regards to security.
And yet SEC is unwilling to in anyway modify any of its aspects, proving in action that fragility of rigidity.
Instead, Congress should at some point have a say. That’s a bold statement considering the brief experience we’ve had with Congress where one man blocked a compromise for completely unrelated reasons, but we should trust that this collective deliberative body can reach reasonable conclusions.
Not least because what they would be regulating is not crypto, but fiat, their own money. They can have whatever views on crypto, but crypto itself is none of their business because it does not involve third parties. The fiat interacting cryptos do, and therefore that is their business.
Regulating Crypto Fiat
The Ontario Securities Commission made a very peculiar statement last month. They say:
“The CSA is of the view that stablecoins, or stablecoin arrangements, may constitute securities and/or derivatives.”
There is no CAD stablecoin as far as we are aware. There is USDc, USDt, bUSD and a few others with it being quite nice we have a number of them because that’s what makes a private market.
We also have our own crypto dollars, like DAI, but this is not quite fiat and so it is none of the regulators’ business.
Even if the Ontario SEC was talking about CAD, however, it would still be none of their business.
Now naturally they can say whatever they want and even do; in this case Crypto.com had to delist USDt from Canada, but there has to be some objectivity, some reasonable reasonableness. Not proclamations like Kings because then no one would hear.
A stablecoin is not a security because it is a dollar, and a dollar is not a security. It is of a different form, in crypto rather than bank dollars or cash, but it is very much an actual dollar.
And US is so lucky to have them actually. Imagine if it was the euro instead, which Europe should be desperate to not just imagine but to promote or incentivize somehow.
The Brits are trying. Andrew Griffith, the Economic Secretary, announced in a meeting with the Treasury Committee that the U.K. government is fully supportive of the use of stablecoins for wholesale settlements between banks.
One witty move here, considering they are so disadvantaged, would be for the Bank of England to say pound stablecoins would be guaranteed by the central bank their 1:1 value.
At some point this will have to happen in any event, and this is why no SEC can have any jurisdiction or any other entity but the FED and other central banks.
That’s because it’s a dollar, and its private market nature is not new either because commercial banks are private.
It’s dollar digital cash, in some ways because they can reverse or freeze transactions, but it is still very much a dollar.
It is also a dollar that even moms and paps in troubled countries might want to hold. Institutions certainly do want to because of defi arbitrage. Arbitraging between exchanges is why it was created to begin with, so it is a ‘clean’ dollar.
It is also, as it happens, probably the best way to CBDC fiat because it is market based and so it knows how to best meet demand, it maintains the public-private nature of fiat and therefore does not get into political considerations in regards to the relationship between the central bank and private banks, and it is gradual in as far as there is no systemic change in fiat, but a transition to the level the public desires.
Both Fed and commercial banks therefore should love stablecoins because in some ways it is their way to Netflix without being Blockbustered.
This space has worked for years to persuade banks they should compete and cooperate rather than fight, and now we’re seemingly moving towards being in good terms, which in some ways is a surprise even though we argued it would happen with the young bankers.
And they’ve been given a gift, really. Not just in stablecoins, but in the whole crypto asset class that adds dynamics to finance and sort of revitalizes it both fairly directly in this competition now giving us faster payments, and indirectly in that there’s a new thing that has to be integrated in all these new systems and therefore these systems will have to get at least some look.
And yet some of these bankers complain that the only advantage in this space is regulation arbitrage. Even if that was so, which is very arguable, banks and other financial instruments have enjoyed such long periods of no regulations when they were new, so why shouldn’t stablecoins or other crypto-fiat aspects.
What’s wrong with just imprisoning the FTX sort, instead of requiring countless of regulations that don’t prevent it anyway at a point when we want more competition in exchanges.
We can’t imprison bankers, and do we at this point want to make that tradeoff of heavy regulations with no prison, or light regulations with prison time?
We’d choose the latter, for this point in time, not least because regulations did not prevent FTX, but did and are preventing competition.
Now at some point the market will stabilize. The internet was a wild west in the 90s too with hacks and all sorts, and hacks still continue, but as it turns out there were only so many services with it that now sort of makes the internet an acronym of FAANG.
At that point, you’d know just what was this thing and what it is, so you can move, but in the 90s any regulation would be walking blind.
Arguably cryptos are still in that 90s, without their Facebook although one can argue Coinbase might be the equivalent.
And so mistakes would be easy. That’s even with the simplest here, stablecoins. Sure, FED has jurisdiction, but how exactly? Does it extend to USDt, which is not American, or bUSD? Should these instead be sank for a monopoly of USDc?
What then of crypto stables like wBTC? Though thankfully one can easily at this point say too small to care.
For the usd-s though, this global nature makes it a bit complicated because Europe for example can say that although it is dollars, it is still based here. Europe thankfully is nice and China conveniently has banned them, but imagine 2008 Russia had some sort of USD-er.
These details however are irrelevant to us and although a lot of this is crypto, they are in many ways irrelevant to crypto itself, so we wouldn’t care too much about whatever they decide seeing as it is clearly in their best interest to come up with reasonable proposals.
Some have a very different view, including potentially the Treasury Secretary. Indeed we’ve read some editorials arguing regulators should rush to impose all sorts during the crypto winter, when they’re down.
We’ve ignored them because we have our own crypto space where we do a lot of this stuff without needing to touch fiat, and so if they want to shoot their fiat part on the foot, then why should we necessarily care to a significant extent.
However, there are signs that the civil service more widely has different views and Joe Biden, the US president, has asked them to come up with all sorts of reports.
We expect them to be academic-ish and objective and apolitical and therefore we do not expect the more horse blinders to prevail.
Instead we trust the side of America that does its best to harness innovation and run with it to have the upper hand when it comes to what actually matters.
And in this case, what matters most at this point may well be competition because it is all too new to stratify and stagnate.
There are not yet even second layers to properly scale blockchains. That means cryptos are currently still on dialup despite their trillion dollar market cap, which ultimately is just one company like Apple.
The market therefore might be the best regulator at this point and if there are to be any regulations, they should be very limited, very uncontroversial, and very pointed.
This space instead should be afforded some more time, not least because we can send our CEOs to prison, unlike traditional finance.
The boys have been decent to this space so far and here too they haven’t disappointed, so what exactly is wrong with this arrangement considering moms are not here yet and considering regulators are making decisions like these Ontarios that clearly have no clue what they’re talking about.
That’s obviously if you’re not anti-crypto and think regulations are a way to “crackdown” and make it go away.
They won’t. China has been fairly brutal in that direction and they still very much crypto. US can’t go anywhere near that extent, and therefore the only thing the anti-crypto people would achieve would be to harm their own fiat dollar because only the fiat parts can be regulated, like fiat exchanges.
A time for regulations will come however, when we have all these reports and Congress finds the time to see what might need to be changed to accommodate crypto specific factors.
But for now the wild west should continue so that its ruthlessness can tell us just what are flowers and what not, at which point then we can see what might be wrong with the flowers.
As it stands, considering regulations did not prevent FTX, there may instead be an argument to lower them to promote more competition because regulations was used as a cover in this case to fractional reserve to their demise.
Tempting therefore as it is to say regulations, it is a lot harder to come up with appropriate ones that strike the right balance, and since we have seen no signs that there have been sufficient analysis towards it in US, prison for CEOs rather than heavy regulations that keeps competitors out seems to us to be a fair deal at this stage.