Crypto-linked bank failures fuel regulation debate

LONDON: The glob­al cryp­tocur­ren­cy indus­try has been slammed 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 keen for over­sight of a sec­tor which boomed 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 remains far below its 2021 peak of $3 tril­lion.
The num­ber of cryp­to cus­tomers “grew dur­ing the Covid lock­downs”, Mar­tin Walk­er, head of bank­ing at the Dutch-based Cen­ter for Evi­dence-Based Man­age­ment, told AFP.
“They joined an unreg­u­lat­ed mar­ket, invest­ing with huge risks but not real­is­ing they were invest­ing in unreg­u­lat­ed and not (always) legal assets,” said Walk­er, who organ­ised a Lon­don con­fer­ence last year of cryp­tocur­ren­cy crit­ics.
He argued that trad­ing plat­forms were con­flict­ed by their unique posi­tion.
“They do have con­flict of inter­ests (…) as own­ers are at the same time both tak­ing risk posi­tions in cryp­to and sell­ing these assets to their con­sumers,” Walk­er added.
“Peo­ple do not realise this is not allowed in con­ven­tion­al finance.“
Reg­u­la­tors also want over­sight of such plat­forms because they hook up cus­tomers, regard­less of expe­ri­ence or knowl­edge, with 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’s untrained and not very well informed”, Bour­gogne Uni­ver­si­ty eco­nom­ics pro­fes­sor Ludovic Desmedt told AFP.
Added 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, illic­it trans­ac­tions using cryp­tocur­ren­cies more than dou­bled last year to almost $21 bil­lion, accord­ing to spe­cial­ist cryp­to firm Chainal­y­sis.
How­ev­er, this esti­mate does not include some ille­gal uses such as drug traf­fick­ing.
In the Unit­ed States, offi­cials are work­ing on a frame­work to over­see cryp­to firms, but in Sep­tem­ber the White House asked reg­u­la­tors to use sim­i­lar reg­u­la­to­ry rules that are applied to oth­er finan­cial ser­vice providers.
As a result, the Secu­ri­ties and Exchange Com­mis­sion (SEC) mar­kets 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 biggest trad­ing plat­form Binance.
Euro­pean Union draft laws, sched­uled to take effect next year, will com­pel cryp­to plat­forms to be more rig­or­ous and trans­par­ent in their oper­a­tions.
In Britain, the gov­ern­ment launched a con­sul­ta­tion this year to estab­lish a reg­u­la­to­ry frame­work for the sec­tor as it seeks to avoid falling behind the EU and Unit­ed States.