Regulators at the Ready

Just as bull markets have narratives, so do bear markets, and the overriding narrative of this year has been regulation. Time and again the media has conflated a lack of regulation in crypto with the failures we’ve seen.

It’s easy for people to conclude that as soon as regulation comes to crypto, investors will have confidence and flood back into the market. If that was true you would expect to see the stock market flooded with liquidity, but tech stocks are experiencing similar conditions to crypto.

Not only is there a misunderstanding about what regulation will bring to crypto, but also a belief that there’s currently no regulation at all. The space however is already covered by existing regulations, but there’s a lack of clarity around which agencies will oversee it and how it will be treated.

The proof that crypto is regulated can be demonstrated by the arrest and indictment of Sam Bankman-Fried this week. The main charges against SBF are wire fraud, wire fraud conspiracy, conspiracy to commit money laundering, and conspiracy to commit commodities fraud and securities fraud. In total 8 charges were filed by Damian Williams, the US Attorney for the Southern District of New York.

Williams said, “From 2019 until earlier this year, Bankman-Fried and his co-conspirators stole billions of dollars from FTX customers.” adding, “He used that money for his personal benefit, including to make personal investments and to cover expenses and debts of his hedge fund, Alameda Research.”

The SEC is now calling on all crypto companies to file disclosures in a similar way to companies listed on the stock market. They said, “Companies should evaluate their disclosures with a view towards providing investors with specific, tailored disclosure about market events and conditions, the company’s situation in relation to those events and conditions, and the impact on investors.”

The irony is that while they’re calling for greater clarity from crypto companies, regulators such as the SEC are failing to provide clarity to the public and the projects building in the space. While almost all projects are in favor of increased regulation it’s dangerous to assume that regulators will always make the right calls in their approach to the space.

As Wilson, our COO said, “We are thinking long term about the direction regulation could take in various countries around the world. We can see the necessity for laws to be created to protect investors and governments. These laws, if executed well, could allow cryptocurrencies to be more deeply integrated into the lives of everyday participants of the global financial system. Paribus is willing to cooperate and adhere to laws and regulations introduced to protect investors.”

Another aspect of regulation that doesn’t receive much focus is the need for them to be reasonable from the perspective of users. If regulators are too heavy handed or too deaf to the concerns of everyday crypto users they will face difficulties in getting people to adhere to them.

It’s already clear that central banks such as the European Central Bank are against the idea of self-custody because they want to protect the role of private banks. Both the collapse of FTX and Luna’s anchor protocol wouldn’t have hurt users if they were able to control their own crypto. Although regulators cite concerns about protecting the public their actions seem to be heading in the opposite direction.

As our CEO Deniz has previously explained, “There is a fine line between useful regulations and regulations that infringe on the freedom the crypto community cherishes. I believe all new laws around cryptocurrencies should follow the core tenets of Satoshi’s vision for a truly open, trustless, and permissionless P2P payment system. Finding regulators who know and understand why this is so important will be key to making the best decisions for the industry and the future of finance.”

Rather than using the failure of centralized systems and corrupt individuals to justify heavy handed regulations we hope the increased focus on crypto will help to educate the public. During all of 2022’s collapses DeFi continued to work, proving that decentralization and self-custody are essential elements for anyone genuinely wanting to protect the public.

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