Cryptocurrency Regulation Is Upside Down

The approach taken by regulators fails to acknowledge the unique qualities of cryptocurrencies and the benefits they can provide, and instead seeks to impose traditional financial rules on a technology that cannot simply be forced into the same category.

New waves of cryptocurrency regulation are usually brought about following some form of incident within the cryptocurrency market. Regulators are therefore reactive to the various irregular events that happen in crypto and use these as a starting point for regulation. This is a shortsighted approach that shows lack of understanding of the technology at best. But to make matters worse, the reaction itself is usually the wrong one too.

Stablecoin Regulation

For instance, this is what the International Monetary Fund has to say about global regulation of stablecoins:

Global regulation for stablecoins should be comprehensive, consistent, risk-based, flexible, and focus on their structural features and use. Requirements on stablecoins should cover the entire ecosystem and all its key functions, and there should be additional oversight for systemic stablecoin arrangements.

This is fair enough but it’s also very vague, meaning that each country gets to decide how to regulate stablecoins. The way the UK government has interpreted this according to this HM Treasury response is by trying to bring central-bank-level regulations on stablecoins.

c. General agreement that systemically important entities (e.g. systemic stablecoin issuers and wallets) should be subject to Bank of England regulation, with respondents seeking further guidance on the thresholds for reaching systemic status.

d. Broad agreement that stablecoins referenced to a single currency should be subject to similar requirements as e-money, though a number of respondents highlighted that some current or proposed business models would not currently meet these regulatory standards.

What this means exactly remains to be seen, but putting a central Bank in charge of regulating stablecoins or cryptocurrency is like putting a petrol-head in charge designing the city’s bicycle lanes.

Meanwhile, the Bank for International Settlements is concerted with making regulatory space for Facebook’s dead Libra project:

The Libra stablecoin in particular could be used across Facebook’s rapidly growing payments offerings in multiple markets including Facebook Pay, WhatsApp Pay and Instagram Pay, with potentially rapid access to hundreds of millions of retail customers in a very short period. If successful, Libra could easily attain mass adoption across multiple jurisdictions given the established networks of Facebook and other Libra Association members, with the potential to achieve substantial volumes relative to the existing payments providers. This could bring a range of benefits, particularly in the context of cross-border transfers, but it also raises substantial questions for monetary and financial authorities.

This one is particularly strange since no one else seems to be talking about Libra. The project pretty much made a b-line to the junkyard of dead dreams the moment it came out of Mark Zuckerberg’s head. Proof that Zuck is, in fact, human.

Moving away from the UK and Global Regulatory bodies, we have Federal and Californian Law in the U.S. California has probably the most fleshed out regulation regarding stablecoins.

One of the bill’s key requirements is a short-term rule (set to phase out in 2028) that crypto businesses licensed in California won’t be allowed to traffic in stablecoins unless they are licensed as a bank or have a license from the DFPI. Companies that don’t acquire such a permit could be fined up to $100,000 a day until they do.

Issuers must also have real financial assets equal to “all of their outstanding stablecoins issued or sold in the United States.” The stablecoin section of the bill seems like it was crafted with recent events in mind; having such a measure might have mitigated the June 2022 collapse of the TerraUSD stablecoin.

The latter does seem like good measure against unbacked assets, especially considering that no Algorithmic Stablecoin has been a success so far.

Staking Regulation

The SEC alongside Gensler, also known as the man who sees securities in everything, has recently charged Kraken with “failing to register the offer and sale of their crypto asset staking-as-a-service program, whereby investors transfer crypto assets to Kraken for staking in exchange for advertised annual investment returns of as much as 21 percent.”

In a similar vein, as of 23rd of February 2023 Binance has ceased all offering all services part of its Earn programme: Staking, YieldFarming and DeFi Staking in the U.K.

Staking cryptocurrency on a Centalised Exchange is potentially risky, yes, as your coins are essentially at the mercy of that exchange’s financial stability. The thing is, staking on a CEX doesn’t bear any more risk than holding your crypto on said CEX. What should be regulated is the amount of control that Exchanges have over user funds, and more importantly how they invest their own funds.

The reason a lot of Exchanges went bust during this bear market, is because they’ve quite literally aped into many questionable investments, while others (FTX) treated user funds as their own personal piggybank. That strategy tends to only really work during a bull run when everything pumps. Exchanges should not be allowed to place positions that may pose a threat to their liquidity and their ability to pay all the users in full in case bankruptcy is imminent.

Banning staking is taking away the ability of many people to earn interest that otherwise might not be possible. You need 32 ETH in order to run a validator node and earn staking rewards, whereas Binance pools multiple user’s funds together to make it possible to stake any amount.

We will continue to see more crypto regulation come and go, and hopefully, regulation that encourages the growth of the crypto industry and doesn’t stifle it. If this is to be done properly, and in a way that’s actually helpful, regulators need to consider a more proactive approach along with long-term thinking.

I would personally like to see more regulation that protects cryptocurrency against market manipulation and the countless rugpulls we’ve seen, as this is ultimately something that users have no control over and need regulation to step on. Whereas risking losing your funds staking or holding crypto on a CEX as things that can easily be avoided with a hardware wallet. Those should be eventually addressed in a thoughful manner, but they are not the priority.

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