Banning crypto betting will not protect investors

Following the legal actions and settlement brought by the Securities and Exchange Commission (SEC) against Kraken, the exchange is effectively prohibited from offering bets-as-a-service until further notice. Banning crypto innovation is a short-term approach that will only succeed in stifling innovation, shrinking US competitiveness and forcing investors to seek potentially riskier alternatives.

This comes on top of the $30 million settlement the exchange reached with the SEC, not to mention the investor exodus that could occur as a result of these negative headlines. Cryptoassets and crypto exchanges have had a rough year or so, and the pace of enforcement action only seems to be picking up, even with some commissioners offering dissenting – and well-reasoned – counterpoints to the regulation-by-edict attitude that seems to have become popularized under current leadership at the SEC.

Investing in itself is not, from an investor’s perspective, an incredibly complicated or difficult to understand process. Investors or depositors distribute tokens in a staking protocol, which can either be managed by a centralized exchange or a decentralized protocol, to earn a return on these staked funds. Simple in concept, but an idea that has spurred intense tax, regulatory, accounting and now legal questions, even as authoritative guidance, it has yet to be issued.

Amidst the debate surrounding the pros and cons of striking, however, there are a couple of points that are overshadowed and overlooked. Blockchain-based applications and tokenized records continue to be embraced by some of the largest firms in the world, including financial institutions, so why is the regulatory outlook turning so negative for crypto-native firms?

Let’s take a look at just a few of the reasons why attempts to ban staking, and stifle crypto innovation, will not protect investors and will instead send those innovations elsewhere.

Driving innovation abroad. The crypto and blockchain space is truly a global sector, with exchanges and other crypto operators headquartered and operating in every major market. While that is a healthy sign for an industry, it also means that no single regulator or jurisdiction has an entrenched and sustainable advantage over any other. Given the regulation-by-enforcement attitude that has seemingly taken root in the US, there is a definite risk that individuals, capital and the creativity associated with it will move to overseas markets.

It is important to keep in mind that 1) exchanges and operators (such as FTX) that were headquartered abroad can operate removed from the oversight of US regulators, 2) US investors are often unable to make full use of international exchanges or trading options, and 3) non-financial ideas and use cases will also develop and spread alongside these exchanges and other operators.

Cryptocurrencies and crypto-trading attract most of the headlines and debate, but are only small parts of where blockchain innovation and tokenized information can drive innovation and improvements for individuals and institutions. Driving these ideas and innovations abroad does nothing to improve the competitive position of the American economy.

Increases the appeal of DEXs. An additional point to the above trend is that time and time again, as centralized exchanges and other crypto operators have either failed, faced tough legal challenges, or otherwise had to contend with a difficult business environment, the appeal of decentralized exchanges (DEX) and tokens will continue to grow. After all, regulations and regulatory attention can only be directed at one entity, while a decentralized protocol or exchange can be more difficult to monitor, regulate and control. As US regulators simultaneously embark on a stricter approach without issuing guidelines or frameworks for exchanges and operators to use, the pivot and shift towards DEXs is almost inevitable.

DEXs certainly bring a lot to the proverbial table, and with improvements continually increasing the user experience for investors at all levels, it looks like centralized players will face tougher competition. However, from an investor safety and protection perspective, DEXs are not a panacea. The problems include fewer trading pairs and investment options for users, little or no customer support, a lack of investor insurance, and the reality that many of these exchanges are located overseas, and therefore not accountable to US regulators.

By cracking down on US headquarters and regulated entities, US policymakers could drive some of these investors to riskier and more opaque operators, potentially increasing the opportunities for bad actors to cause financial harm.

Suffocating regulation and dialogue. The approach taken by the SEC, which continues to serve as the de facto regulator of crypto in the face of limited additional guidance or information, can be described as increasingly antagonistic. Although the commission is publicly asking organizations to come in, engage with the regulator and work with the individuals there, there have been several high-profile lawsuits, settlements and other enforcement actions against incumbents.

In an environment where the primary regulator has not issued authoritative guidelines or rules for firms to follow and appears to prefer litigation to dialogue, it should come as no surprise that innovation and creativity are flowing elsewhere. Blockchain-based applications are increasingly being used by some of the largest and most influential firms in the world, and are being embraced by various nations around the world. The US has a unique role to play as the world’s largest economy and holder of the reserve currency, but shrinking and stifling innovation in arguably the most important technology for decades is not the way to maintain a leadership position.

Staking is a crypto use case that allows investors of all kinds to participate in the value creation process, attempts to ban it will not protect investors and will only succeed in driving capital, innovation and growth out of the US

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