The Haphazard Crypto Crackdown Is A Threat To Future Financial Innovation

This has not been a good month for crypto regulatory clarity: State regulators ordered Paxos to stop issuing the stablecoin BUSD, pegged to the U.S. dollar, and the Securities and Exchange Commission (SEC) may sue the company for issuing the stablecoin, on the grounds that it may be a security.

All of this and more has sent banks running away from crypto due to a lack of clarity on regulators' stance. After years of doing nothing, regulators are hitting at crypto from many unpredictable and likely misguided directions.

This kind of knee-jerk behavior is not just a threat to the crypto sector but to other alternative assets and all future innovations in the financial sector. The majority of the crypto sector is filled with talent — with people who know how to manage risk, understand the bounds of innovation and deliver real products even in stormy times.

To preserve and encourage this talent, which will drive future innovation, laws need to be enforced better and in a more fair and organized manner.

Communicate and Plan Out New Regulation

Major regulatory changes are usually proposed to the public and have a public comment period before they are enacted. The same should happen for crypto.

There should be a clear plan, so investors and the industry know what to expect. Such a plan should also be clear about the implications for banks so that banks can better embrace innovation. This should have happened a long time ago.

It is obvious now that the lack of clear communication and a road map from regulators is currently spurring banks to distance themselves from crypto, based on rumors and fear alone. The same regulatory office that announced in 2020 that it would allow banks to hold crypto for customers recently warned it was now worried about the banking sector's exposure to crypto.

But it is not clear what these "concerns" will lead to, forcing banks to guess. Financial innovators and institutions should not be forced to make decisions based on rumors; this definitely does not protect the consumer.

Define New Assets in a Timely Manner

The SEC is acting like everything connected to crypto is an asset it must monitor and warn about.

The SEC, Commodity Futures Trading Commission (CFTC) and others need to define and then remain in their own jurisdictions. This overreach is partly due to the fact that there remains a debate about whether cryptocurrencies are securities, another type of asset or something else altogether.

It is a regulatory failure that these bodies and the government are still unsure how to define assets in the crypto world after more than a decade. This is a world worth nearly $1 trillion even during its recent low point in January.

The fact that this decision will likely be made via the Ripple lawsuit is a sign of just how much the government has dropped the ball. A ruling on the suit, in which the SEC sued Ripple for illegally selling a cryptocurrency to investors without first registering it as a security, is expected later this year.

Enforce Existing Fraud, Theft and Other Laws

Putting the inexcusable regulatory mess aside, authorities should be using existing laws to more aggressively root out fraud and theft in the crypto sector.

For example, it should not have taken so long to arrest Sam Bankman-Fried, the founder of the bankrupt crypto trading platform FTX, which was allegedly using its investors' money for its associated hedge fund and other pursuits while at the same time promising them the money was safe and risk-management controls were in place.

Theft and lying to clients is a crime even when it happens to crypto and regardless of whether crypto is a security or not.

Putting Future Financial Innovation at Risk

Unaddressed fraud and theft in the crypto sector is a threat not only to the sector and its investors but to future financial innovation.

If regulators continue to treat all crypto as a gray area rather than identifying and addressing the actual breaking of rules and laws, the good players — and more importantly, the financial talent and innovation behind them — will go elsewhere, leaving the American financial system behind.

With technology continuing to develop at a record pace, presenting both new opportunities and challenges (Hello, ChatGPT), regulators need to be able to act quickly and design road maps and policies to keep up with new technology.

Crypto is not the end of new financial products; it is just the beginning — but the ongoing regulatory failure and confusion very well could mark the beginning of the end of financial innovation in the United States.

(Dmitry Gooshchin is the chief operating officer and co-founder of EndoTech, an AI trading platform.)