Coinbase Founder and CEO Brian Armstrong attends Consensus 2019 at Hilton Midtown on May 15, 2019 in New York City.
Steve Ferman | Getty Images
FTX – until recently one of the largest crypto exchanges in the world – declared bankruptcy on Friday after revelations about its business practices led to a wave of customer withdrawals, with insufficient funds to make those withdrawals.
Coinbase has no material exposure to FTX, but I have a lot of sympathy for everyone involved in the current situation. It’s stressful whenever there’s a potential for losing customers in our industry, and a lot of people are losing a lot of money to FTX’s struggles.
It’s also important to be clear about why it happened – and what needs to change if we are to prevent something like this from happening again.
FTX’s downfall appears to be the result of risky and unethical business practices, including conflicts of interest between deeply intertwined entities and decisions to lend assets to clients without permission. It should be noted that these activities also occur in traditional financial markets – and in fact, blockchain technology will make it easier to track and prosecute over time.
Following the events of this week, we are already seeing calls for more regulation of the crypto industry, with tighter restrictions on access and innovation. The problem is that, until now, US regulators have refused to provide clear and sensible regulations for crypto that would protect consumers.
Crypto regulation in the United States has been difficult to navigate, and regulators have so far failed to provide a workable framework for how these services can be offered in a safe and transparent manner. This means that an array of crypto-based financial products, including lending, margin trading, short selling, and other tools that are fully legal and regulated in traditional financial markets, are virtually banned in the states. -United. Entrepreneurial teams that create new decentralized products are afraid to grow. of the United States for fear of litigation. They don’t want to break the rules and right now they don’t know what the rules are.
As a result, US consumers and advanced traders have engaged with risky offshore platforms outside the jurisdiction – and protection – of US regulators. Today, over 95% of crypto trading activity occurs on exchanges overseas.
Part of the reason FTX was able to do what it did is that it operates in the Bahamas, a small island country with very little regulatory oversight and ability to oversee financial services businesses. Did regulators force FTX to behave the way it did? No. But they created a situation where FTX could take dangerous risks without repercussions.
Instead of putting in place clear guidelines for crypto, US regulators have focused on regulation by enforcement – suing US-based companies for not following the rules without actually establishing what those rules are. Coinbase itself fell victim to this practice earlier this year, when the SEC accused the company of listing unregistered securities, a charge we strongly deny. It’s bad for US competitiveness and bad for Americans who lose money when foreign companies fail.
All of this helps explain why tougher regulation would only make the problem worse for crypto businesses and crypto users overseas. Instead, we need more intelligent regulations that protect consumers and make the United States a more attractive place for crypto companies.
Despite the prevailing idea that crypto companies don’t want to be regulated, many if not most companies have been working with policymakers for years. Those of us who care about the future of crypto want to create sensible regulation for centralized exchanges and custodians in the US and other regions.
In the long run, the crypto industry has an opportunity to build a better system using decentralized finance and self-custodial wallets that don’t rely on trusted third parties like exchanges. Instead, customers will be able to trust the code and the math, and everything can be publicly auditable on the blockchain. Until then, however, regulators need to set clear rules that bring crypto down to earth, encourage innovation, and protect consumers.
The United States has always prided itself on being at the forefront of new technologies and industries. With over 200 million global crypto users and countries beginning to pilot digital currency programs and accept bitcoin as legal tender, the time for crypto has come.
Now the United States has a choice: take the lead in providing clear, business-oriented regulation, or risk losing a key driver of innovation and economic equality.
Brian Armstrong is the CEO and co-founder of Coinbase.
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