The point of developing Bitcoin, the first cryptocurrency, was that it would be a way to buy and sell over the internet and a way to carry out financial transactions person to person without relying on or paying a third party or middleman. Since the original focus of cryptocurrencies was to avoid interference by third parties, including governments, the idea of regulation of crypto was anathema for years. That is, it was until crypto winter, a string of crypto-related bankruptcies, and recurring cases of fraud caused investors to lose obscene amounts of money. This is basically why crypto needs regulation.
Trust in Crypto Evaporates
There was always some distrust of cryptocurrencies when prices started to rise and tokens like Bitcoin became very volatile. Folks who invest in stocks, bonds, or real estate look for what they call intrinsic value in their investments. Intrinsic value is what an asset is worth based upon forward looking cash flow. Because Bitcoin tokens do not generate cash flow, the innate value of Bitcoin was based on the limit to how many tokens will ever be produced (minted) and trust of the public that Bitcoin (and other tokens) would be a long term store of value, a hedge against inflation, and a safe haven when other financial assets plummeted. The first loss of trust in crypto was simply because so many people lost money as Bitcoin fell by as much as three-fourths of its November 2021 value.
Fraud Emerges As a Risk in Crypto Businesses
Aside from market risk, the only problems in owning crypto tokens or doing business with a decentralized finance entity was that you or they could be hacked or that you would not keep track of the keys (codes) that allow you to have access to your crypto tokens. When crypto winter set in it first appeared that that only issue was another valley in the sequence of peaks and valleys in crypto markets. Then, one after another, crypto exchanges and DeFi businesses went under. After the fact in most cases it became clear that crypto businesses had been playing fast and loose with customer funds in order to keep afloat. Further down the line it has become clear that companies like FTX were violating laws and engaging in fraud before there was even a hint of crypto winter.
Crypto Moguls As the New Robber Barons
Back in the late 19th century there were owners of US businesses that were on one hand called “captains of industry” and on the other hand “robber barons.” These robber barons used unethical business practices to monopolize entire industries before “trust busting” at the beginning of the early 20th century made many of their practices illegal. What has come to light in the aftermath of business collapses like that of FTX was how similar the actions of “moguls” in the crypto realm were to those of the robber barons of an earlier age. Monopolies like Standard Oil were broken up and laws and regulations put in place to help ensure fair business practices and fair treatment of customers of such businesses. While many of the now-disgraced crypto captains of industry talked a good story about following the crypto ideal of fair person to person business practices, they were, in fact, acting like robber barons in their business practices and, in fact, dipping into customer funds for their own personal use.
Why Regulate Crypto?
When a regular financial business like a bank holds someone’s money on deposit it is insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per account. In return, banks need to comply with various rules to make sure that they have sufficient assets to cover any withdrawals. Banks do not usually have all of the necessary cash on hand because they rarely need it. The money is put to work in loans, mortgages, and other investments to make money in order to pay interest on deposits, cover expenses, and create a profit for bank owners or stockholders. It is trust in the bank and trust in the banking system that keeps depositors from all taking out their money at the same time.
The point of bringing regulation to bear on crypto businesses is to ensure the safety of people’s investments in or deposits with these businesses and to engender the necessary trust that leads to a stable business sector. Rather than hurting DeFi and the rest, proper regulation will likely make the crypto sector more trustworthy and successful.
Why Crypto Needs Regulation – SlideShare Version