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Regulatory Change In Crypto Has Not Happened – Here’s Why
It’s no secret that the crypto community has been sweating the threat of a deluge of heavy-handed regulations for a while now. And while the threat is ever-looming like the Sword of Damocles, no one on the regulation side has pulled the trigger just yet. But that doesn’t mean a slew of unreasonable politically motivated proposals isn’t stacking up that show policy makers still don’t grasp the fundamentals of blockchain technology or the concept of Web3.
Steven Eisenhauer, chief risk and compliance officer at Ramp, takes a look at the problem from a risk management perspective, and offers some ideas on how things could be done better.
The only potentially well-informed (although imperfect) legislative efforts on the horizon – Europe’s landmark crypto legislation, MiCA – has been held up for a second time, apparently to allow more time for translation.
Instead, what we’re seeing is redundant legislation being proposed to solve a problem that has been misdiagnosed for political expediency. This reflects poorly on the depth of knowledge that our regulators have on Web3 technology as a whole, and how competent they actually are in protecting consumers.
Sometimes new technologies require new approaches to regulations. Let’s consider what's wrong with the current approach, try to identify the real issues, and propose solutions to forge a new way forward.
Take for instance the so-called Digital Asset Anti-Money Laundering Act introduced by Sens. Elizabeth Warren (D–MA) and Roger Marshall (R–KS) in December of the previous year.
The proposed legislation was presented at a Senate Banking Committee titled “Crypto Crash: Why the FTX Bubble Burst and the Harm to Consumers.” It would do little to protect consumers and would have done nothing to prevent what happened at FTX – as the almost singular focus of crypto-related regulations to date, a robust set of anti-money laundering (AML) rules have been widely applicable to crypto firms since before Sam Bankman-Fried even founded FTX.
As evidence of the effectiveness and application, we need only consider the settlement between Coinbase and the New York Department of Financial Services (NYDFS), which is only the latest example in a long list of regulatory actions taken against crypto firms related to anti-money laundering and sanctions failures.
Warren’s involvement in this bill and the wholesale mischaracterization of its impact is particularly surprising, given her strong consumer protection bona fides (Warren is alternatively vilified and praised, depending on one’s political standing, for her leading role in the creation of the Consumer Financial Protection Bureau).
To many in crypto, this is nothing more than a direct attack on the entire space.
More likely, what we are seeing is all too common in politics: uninformed and desperate attempts to appear to be doing something – anything – in the aftermath of a disaster. Presenting more anti-money laundering legislation is easy and politically safe.
To be clear, there are gaping holes in the global regulatory frameworks for digital assets.
Most countries lack robust financial regulation applicable to crypto firms in the areas of consumer protection, safeguarding of customers' funds, capital and liquidity requirements, concentration risk management and disclosure requirements.
The need to address these regulatory gaps is widely acknowledged and quite urgent. The problem seems to be an unwillingness of some legislatures to educate themselves – a surprising statement in the wake of FTX!
This is all akin to a doctor that is unable to diagnose a patient’s ailment, yet opts to prescribe antibiotics so that they are seen to be treating the patient. Not only is it dangerous for the patient, who may forgo further tests in the false hope they will be cured, but it also contributes to global antibiotic resistance.
Prioritizing redundant legislation is similarly insidious, as it gives consumers a false sense of protection and further erodes confidence in global financial systems.