Crypto-related bank failures are driving the debate about regulation
The global cryptocurrency industry has been hit by setbacks, scandals and high-profile failures in recent months, sparking a regulatory rush to protect consumers from fraud and scams.
Global finance was rocked by the collapse of Silicon Valley Bank last week, and the digital currency sector was hit hard by the demise of US crypto lenders Silvergate and Signature – just months after the bankruptcy of troubled crypto exchange trading platform FTX.
Regulators are increasingly concerned with overseeing a sector that flourished during the Covid pandemic when many people were stuck at home.
The global crypto market stands at more than $1 trillion and has risen sharply in recent months, although it is still far below the 2021 peak of $3 trillion.
– ‘Big risks’ –
The number of crypto customers “grew during the Covid lockdowns”, Martin Walker, head of banking at the Netherlands-based Center for Evidence-Based Management, told AFP.
“They joined an unregulated market, invested with great risk, but didn’t realize they were investing in unregulated and not (always) legal assets,” said Walker, who organized a London conference last year with critics of cryptocurrency.
He argued that trading platforms conflicted with their unique position.
“They have conflicts of interest (…) as owners simultaneously both take risk positions in crypto and sell those assets to their consumers,” Walker added.
“People don’t realize that this is not allowed in conventional finance.”
Regulators also want oversight of such platforms because they connect customers, regardless of experience or knowledge, to the complex world of cryptocurrency.
Such trading platforms are “the link between what would be a very technically complex world, both in terms of finance and technology, with a population that is untrained and poorly informed”, economics professor Ludovic Desmedt at the University of Burgundy told AFP.
Adding to the picture, cryptocurrencies can experience volatile price swings and their value is not determined via transparent markets – as is the case with traditional currencies, stocks or commodities.
As a result, illegal transactions using cryptocurrency more than doubled last year to nearly $21 billion, according to specialist crypto firm Chainalysis.
However, this estimate does not include any illegal use such as drug trafficking.
– Decomposition –
In the US, officials are working on a framework to oversee crypto firms, but in September the White House asked regulators to apply similar regulatory rules that apply to other financial services providers.
As a result, the Securities and Exchange Commission (SEC) market regulator took legal action against crypto lenders Genesis and Gemini.
And in February, the SEC ordered crypto firm Paxos Trust to stop issuing dollar-pegged cryptocurrency BUSD, a stablecoin, for the world’s largest trading platform Binance.
The European Union’s draft law, which is scheduled to come into effect next year, will force crypto platforms to be more strict and transparent in their operations.
In the UK this year, the government launched a consultation to establish a regulatory framework for the sector that tries to avoid falling behind the EU and the US.