Regulatory crackdown is here for crypto. As usual, it centers on whether certain offerings should be classified as securities. Because if something is a security in the government’s eyes, a lot of regulatory strings start getting attached.
I think this is barking up the wrong tree. The risk in crypto is not in products, it’s in people. If regulators shift their focus in that direction, there’s a way everyone can win.
Start at square one. The government’s mission is to protect investors. From what? Mostly the behavior of bad actors. Bad actors in the financial realm take the role of leaders (Elizabeth Holmes) and con artists (Bernie Madoff). There are of course regulations that aim to limit individuals from market or systemic risk, but those risks are rarely known before they do damage. The regulatory system is mostly to deter and detect bad actors.
There’s a big catch applying this to crypto-land. There are no authorities or institutional checkpoints in the cryptographic architecture. No one has access to alter any of the fundamental properties of each token. It’s all there, transparent, and in the instances where it can adapt and change, it does so according to a pre-set protocol.
The risk to crypto investors is not that they might one day find out that the product they bought isn’t what they were told. There’s no faking blood samples or cooking the books. The risk in crypto is the volatility that’s inherent to the asset class. The risk is that at any moment, the price of the thing they bought can come crashing down without reason or warning.
It follows that the people who pose a threat are those with the most ability to move the markets.
Those people are whales, investment vehicle providers, fund managers, token creators. The crypto VIP. In this new wild west, they have the effective power of an activist investor — something between a CEO and a hedge fund. It makes sense to begin regulation by imposing trading rules and disclosure requirements akin to the constraints of these groups in traditional markets, to crypto owners who meet some certain market-cap threshold in any given asset. Of course, that would mean transparency of wallets and ownership, which could indeed be a herculean task… but the IRS may well be laying the groundwork for bringing some of this anonymity out of the shadows already.
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Corporate CEOs today can trade their stock but must file advance warnings and each move is registered with the SEC. Hedge-funds with assets over $100 million must disclose holdings quarterly. Employees at financial institutions with access to non-public information are subject to onerous trading rules and holding periods.
Adapting these rules to the crypto world would bring important transparency to an industry that’s subject to huge swings based on the words and actions of its biggest investors and proselytizers – Example No. 1 being Mr. Elon Musk and dogecoin.
Take this argument to the extreme and it may even open a path to avoiding the securities label.
To classify as a security, the owner must have an expectation of profits from the investment.
If the government disallowed crypto VIPs to exchange their tokens for anything other than goods or services, for a minimum period of say, five years, it would be a bold demonstration that these tokens are more like currencies or a commodity like gold. No trading or conversion to dollars; only point-of-sale transactions. If crypto holders truly believe what they say, they should be more than happy to hang onto their currency for as long as the government requires.
Regulators need not worry that investors don’t know what they’re buying. We should all worry about extreme, crushing volatility. Build the guardrails around those who have the power to create it, and everyone wins.