Opinion: Regulating crypto is the only way it will thrive

by Arthur · July 21, 2022

By Maxim Galash

Regulation is something most industries work hard to avoid or minimize. For the crypto economy, however, regulation represents salvation.

Maxim Galash is CEO of Coinchange. Maxim Galash is a serial entrepreneur, investor and advisor with over ten years of experience in building technology companies in FinTech, Blockchain and IT services. Max is currently the CEO of the fast-growing DeFi platform CoinChange Financials, and a board member of Wattum.io. — Maxim Galash

The need for rules is more urgent than ever. Segments of the crypto-economy are becoming too big to fail, putting investors and entire financial systems at risk. The $40 billion of TerraUSD and its associated Luna token provided a taste of this, wiping out life savings and triggering a wider cratering of crypto prices. Coinbase is cutting 1,000 jobs amid a drastic decline in trading, and Celsius has halted withdrawals.

The risks are increasing, although most regulators do not put them at the top of their to-do lists. It’s a mistake. The total value of stablecoins pegged to the dollar is now around $170 billion, representing a significant threat to financial stability. Even after the recent dump, the total crypto market stands at $968 billion – up from $200 billion at the start of 2020.

Financial regulation always evolves after collective pain arouses public pressure for protection. For example, the financial crisis of 2008 led to the Dodd-Frank Act, the Emergency Economic Stabilization Act, and a series of steps by the Federal Reserve, all aimed at creating stability and preventing risky behavior. The hope is that we don’t need a similar systemic collapse to drive real change for crypto and that regulators and lawmakers can get ahead of the curve.

Indeed, we are seeing early stabs at legislation following the recent tumult. Two US senators have proposed a new Responsible Financial Innovation Act, and Britain has amended existing rules to help regulators deal with the possible collapse of some stablecoin firms.

More needs to be done.

Players in the industry must realize that regulation is essential for the continued use of crypto. Disasters like Terra-Luna and others before it have reinforced the Main Street view that crypto is a scary place, full of scams, bad actors and huge risks.

Businesses worldwide should engage with governments and embrace legal frameworks that help bring crypto into the mainstream.

4 steps for responsible supervision

There are four steps that would represent a good start – classifying assets, strengthening consumer protection and regulating stablecoins.

A lack of clarity about how the government views and treats various digital assets is holding crypto back. The absence of regulation in the US and most other countries means there are few clear answers about what different protocols and platforms must do to gain legitimacy, and how investors should treat the roughly 20,000 crypto tokens for tax purposes. A big question hanging over the industry is whether most tokens meet the definition of a security, and are therefore subject to stricter reporting and registration rules. Hopes that the lawsuit filed by the SEC against crypto company Ripple on this question would provide a quick answer have been dashed as the case drags on.

1. Clarity from legislators

Regulators can put other tokens in the buckets of currencies or commodities, allowing investors, issuers and exchanges to treat them accordingly. Until we get this clarity from lawmakers, crypto adoption and positive financial innovations will be held back by confusion over tokens’ legal and tax status.

2. Consumer protection

Consumer protection is another regulatory support largely absent for crypto investors. Anyone in the world can create a token, market it and sell it, without having to meet any regulatory requirements or face clear legal consequences for wrongdoing. US crypto exchanges gave customers access to UST and Luna right up until their collapse.

Regulation would not prevent everyone from being exposed to shady projects. There is always a way to buy coins using VPNs and overseas exchanges. But by holding domestic stock exchanges accountable, the authorities could have prevented losses inflicted on many thousands of investors.

3. Understand the risks

Regulations must strike a balance between protecting vulnerable consumers and allowing freedom of access to wealth-creating opportunities in crypto. Limiting participation in returns to wealthy accredited investors, as some US platforms have begun to do, is unfairly restrictive. A better idea might be to require customers to pass a financial competence test before they are allowed to invest.

4. Stable coins

The second top priority for regulators should be to ensure the stability of stablecoins like Tether and USDC. These coins linked to the dollar play a crucial role because they are widely used in trading pairs and are an on-off ramp between crypto and fiat. Ensuring that these providers are regularly audited to ensure that they can meet their obligations and that holders have some protection – similar to the FDIC guarantee of bank deposits – will go a long way towards reducing crypto risk. The UK’s proposal after the UST collapse for new rules to deal with stablecoin failures was a step in the right direction on this front.

A few jurisdictions, such as Dubai and Singapore, have shown that it is possible to develop regulations that strike a balance between managing the risks of crypto and providing a legal framework for it to flourish.

Essentially, US regulators and lawmakers should follow suit; the US crypto sector can only benefit.

About the author: Maxim Galash

Maxim Galash is CEO of Coinchange. He is a serial entrepreneur, investor and advisor with over ten years of experience in building technology companies in FinTech, Blockchain and IT services. Max is currently the CEO of the fast-growing DeFi platform CoinChange Financials, and a board member of Wattum.io.