Crypto Gets the Regulation It Deserves

The failures that have occurred in the crypto space over the past year have led some voices in the ecosystem to prophesy that “regulation is coming,” and that it’s just what the crypto industry needs to mature and evolve.

While I agree more regulation is needed and would be helpful, many in government – our federal prudential regulators in particular – seem intent on the opposite: keeping crypto outside of the regulated system.

Their posture is not, "We’ve seen what’s happened with FTX and others and think it’s time we bring regulation to the space to make it safer."

Rather, it seems to be: "We don’t want to have any responsibility for this space that we think is disreputable and risky, and we certainly don’t want to be seen as legitimizing it by regulating it."

Matthew Homer, a CoinDesk columnist, is a VC investor and adviser to founders in the crypto space. This opinion piece is part of CoinDesk's Policy Week.

What does this mean for founders and companies operating in this space? If the past two years were about educating government, the next two will need to be about earning their respect as a necessary precondition for trust.

This might mean starting to look more like the institutions they already regulate and are familiar with. Rather than saying you deserve to be part of the financial system, you’ll need to show it.

One way to do that is by putting in place time-tested best practices that exist in other areas of financial services: corporate governance, risk management, internal controls and a culture of regulatory compliance.

Some in the crypto space already take these things seriously, but we need more to do so because it will be up to those working in space – not government – to make it trusted and last the test of time.

Read more: Jesse Hamilton - After FTX: How Congress Is Gearing Up to Regulate Crypto

The recent Joint Statement on Crypto-Asset Risks to Banking Organizations from the U.S. Federal Reserve, Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) is a good illustration of the federal government’s regulatory posture.

The key lines are the following: "The agencies believe that issuing or holding as principal crypto-assets that are issued, stored or transferred on an open, public and/or decentralized network, or similar system is highly likely to be inconsistent with safe and sound banking practices."

And: "It is important that risks related to the crypto-asset sector that cannot be mitigated or controlled do not migrate to the banking system."

Or put more plainly in my own words: We think crypto is simply too risky to be part of the regulated system. We can’t tell you definitively that you can’t touch this stuff, but please know we’ll be very displeased and make your life difficult if you choose to do so.

While this is a broad-brush approach with echoes of Operation Choke Point, it’s hard to argue their fears are unjustified after the events of last year, even if it is ultimately unworkable to keep open, public and/or decentralized networks segregated from other areas of financial services for long. As Somerset Maugham put it in “The Razor’s Edge,” one “might as well try to hold back the waters of Mississippi with [their] bare hands.”

While we may get some regulation through legislation, don’t expect regulators to voluntarily roll out new regulatory proposals accompanied by the notice and comment periods of yesteryear.

See also: Matt Homer – The Infuriating Patchwork of Crypto Regulations Is Good for Crypto

Rather than waiting for that to occur and hoping for a clear road map to emerge, executives and founders in the space should look to the best practices that exist elsewhere in banking and other mature areas of financial services and implement them as quickly as possible.

Doing so is the best way to prepare for both an extended period for regulatory scrutiny and uncertainty as well as whatever set of new rules that may eventually emerge.