Regulating Crypto? So, Who Does It?

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Sam Bankman-Fried/FTX (left), Jessie Powell/Kraken (top), Antoni Trenchev/NEXO (bottom)

Nothing like a crypto market meltdown (a/k/a crash) to bring out more cries for strong regulation. The public and “innocent” investors need to be protected, ya know. Not that the topic of regulating the crypto sector hasn’t been hashed over for quite some time, but now “real” money has been lost. That’s what brings out the media, regulators and (gasp) political aspirants. Time to get serious. The fire department is on the scene but the buildings already burned down. But, moving on, who should regulate a global decentralized market?

First off lets be clear, bitcoin is not going to zero, the entire crypto market infrastructure has been way over-leveraged and the inevitable shakeout (cleansing) is probably long overdue. Not pleasant, but inevitable. And certainly there will be more regulations coming down the road. The consolidation of firms (some fail, some get absorbed) has just begun. The digital asset (crypto) sector is coming of age. But again how, and who, should regulate the sector?

Lets begin with who should not be in charge of regulating the sector. The SEC (Securities & Exchange Commission………..not the SEC football conference). Why? Let’s just say their track record is “iffy.” Remember Lehman Brothers? How about Enron? Or, even better, Bernie Madoff. The SEC was “rebuked” for regulator failure with Lehman Brothers. The examiner who studied the Lehman collapse told a congressional panel that regulators failed to protect investors. The examiner said the SEC was clueless about Lehman’s use of accounting manipulations.

Enron? Another huge collapse. Enron executives used fraudulent accounting practices to inflate the company’s revenues and hide debt in its subsidiaries. Again, the SEC was accused of negligence—and, in some cases, outright deception—that enabled the fraud.

Ah, but the real “trophy” for SEC ineptitude goes to the ponzi scheme run by Bernie Madoff. For forty (yes 40) years, Mr. Madoff ran fictitious paper trades promising solid returns in stock/options strategies to defraud investors of over $60B. Mr. Madoff was also, at one time, Chairman of the NASDAQ. Also, totally under SEC regulatory supervision. Case in point: the SEC was informed many times that Madoff was a fraud, even pointing out that some trades were “made” on days markets were closed. So should the SEC be tasked with regulating a crypto asset sector it does not even understand?

Instead, perhaps the SEC should just bow out. Yeah, really. Maybe the Commodity Futures Trading Commission (CFTC)? Bitcoin has already been quasi-defined as a commodity. BUT, those two are only for U.S. regulations. What about the whole globe? Crypto is global after all. Idea!! How about a global self regulatory body?

Borrowing from the NFA (National Futures Association), which defines itself as follows: “NFA is the industrywide, self-regulatory organization for the U.S. derivatives industry, providing innovative and effective regulatory programs”. Obviously every cryptosystem entity (exchange, broker, lender, wallet, etc.) has a vested interest in protecting their clients AND their own business. So why wait for individual regulators to dictate rules? Again, IDEA!!

Why not establish the “GCA” (Global Crypto Association?) to self-regulate and provide a framework for oversight of all cryptosystem entities? The natural leadership should be the leaders of firms that have gained strength (in other words, did not get devastated in the recent “crypto crash”). The “GCA” could establish certain standards and make sure proper controls are in place to protect clients/investors as well as provide oversight of the global digital asset infrastructure. Bet even government regulators would approve.

So how about Jessie Powell, CEO of Kraken, Sam Bankman-Fried, Founder of FTX, Antoni Trenchev, Co-founder of Nexo among others take charge of their industry and set standards that would ensure investors that they are safe. A “stamp of approval” so to speak. Oh, and “weed out” the less desirable entities. Just thinking.