How Crypto Can Prepare for Regulatory Scrutiny: Earn Respect from Regulators

The failures that have occurred in the crypto space over the past year have led some voices in the ecosystem to prophesy that “regulation is coming,” and that this is exactly what the crypto industry needs to mature and evolve.

While I agree that more regulation is necessary and would be helpful, many in government – ​​especially our federal regulators – seem intent on the opposite: keeping crypto out of the regulated system.

Their attitude is not, “We’ve seen what’s happened with FTX and others and think it’s time we bring regulation to the space to make it safer.”

Rather, it seems to be: “We don’t want to have any responsibility for this space that we think is obscene and risky, and we certainly don’t want to be seen as legitimizing it by regulating it.”

Matthew Homer, a CoinDesk columnist, is a VC investor and advisor to founders in the crypto space. This opinion piece is part of CoinDesk’s Politics week.

What does this mean for entrepreneurs and companies operating in this area? If the last two years were about educating the government, the next two must be about earning their respect as a necessary prerequisite for trust.

This may mean that they start to look more like the institutions they already regulate and are familiar with. Instead of saying you deserve to be part of the financial system, you have to show it.

One way to do that is to put in place time-tested best practices found in other areas of financial services: corporate governance, risk management, internal controls and a culture of regulatory compliance.

Some in the crypto space are already taking these things seriously, but we need more to do so because it will be up to those working in the space – not the government – ​​to make it reliable and stand the test of time.

The key lines are the following: “The agencies believe that issuing or holding crypto-assets that are issued, stored or transferred on an open, public and/or decentralized network, or similar system, is highly likely to be inconsistent with safe and sound banking practices.”

And: “It is important that risks associated with the cryptoasset sector that cannot be mitigated or controlled do not migrate to the banking system.”

Or put more clearly in my own words: We believe crypto is simply too risky to be part of the regulated system. We can’t definitively tell you that you can’t touch these things, but please know that we will be very unhappy and make your life difficult if you choose to do so.

While this is a broad-brush approach with echoes of Operation Choke Point, it’s hard to argue that their fears are unwarranted after the events of last year, even if keeping open, public and/or decentralized networks separate is ultimately useless from other areas of financial services for a long time. As Somerset Maugham put it in “The Razor’s Edge”, one might as well try to hold back the waters of the Mississippi with [their] bare hands.”

While we may get some regulation through legislation, don’t expect regulators to voluntarily roll out new regulatory proposals accompanied by notice and comment periods from last year.

Rather than waiting for that to happen and hoping for a clear road map to emerge, leaders and entrepreneurs in the space should look to the best practices found elsewhere in banking and other mature areas of financial services and implement them as quickly as possible as possible.

Doing so is the best way to prepare for both an extended period of regulatory scrutiny and uncertainty, as well as a set of new rules that may eventually emerge.