The government needs to stay away from cryptocurrency

FTX, a cryptocurrency exchange platform that operated in the Bahamas and that had numerous celebrity endorsements and even naming rights to the Miami Heat stadium, just collapsed, resulting in users losing billions of dollars overnight. It’s now becoming clear that the reason for the company’s financial failure is fraud, gross mismanagement, or some combination of the two. Regardless of how and why it happened, an incident such as this is sure to give regulators, already eager to exert control over cryptocurrency, all the ammunition they need to usher in a host of new bureaucratic policies in what has otherwise been painted as a “Wild West” landscape with next to no government oversight. However, this urge to clamp down ought to be resisted for both philosophical and practical reasons.

There is no debate that the recent collapse of FTX caused panic in the crypto market. Top cryptocurrencies like Bitcoin dropped in value by more than 20% in a matter of days, while lesser-known “altcoins” have fallen 50% on average, bringing the total sum of loss in the industry to about $1.3 Trillion in the past year. Even for an industry that was always defined by volatility, these losses have been staggering both in scale and speed.

All that said, when looking at the crypto market from a long-term perspective, the FTX collapse doesn’t particularly stand out, given that this sort of instability has always been a key feature of cryptocurrency. While regulators see this whipsawing as a flaw in need of the government’s heavy hand to correct it, this viewpoint ignores the reality that crypto is philosophically based on the principle of decentralization. Should government ignore that principle to exert control over it, cryptocurrency would lose a defining feature that makes it attractive to many of its users.

Image: Cryptocurrency by master1305.

In short, bringing crypto under a centralized and burdensome regulatory authority structure wouldn’t tame the market; it would probably kill it. If regulators are truly looking out for the consumer’s best interests in this industry, they should understand crypto principles and forgo new rules in favor of relying on existing criminal laws that already allow them to go after those who committing fraud—as FTX has likely done by violating user agreements when it leveraged depositor’s money to engage in risky trading behavior.

Practically speaking, regulating cryptocurrency, or even just crypto exchanges, is also likely to prove unworkable without substantial changes to the status quo. For example, if they are to be regulated, what agency should oversee these exchanges?

Because exchanges hold the depositors’ money and cryptocurrency, it might, at first blush, make sense to treat them like banks. This, in turn, would entail granting the Office of the Comptroller of the Currency (“OCC”)  governing authority over them. However, these exchanges don’t function in the same manner as a normal bank does because they also operate as a place for customers to trade cryptocurrency. The OCC isn’t built to oversee stock markets, meaning its employees lack the institutional knowledge or skill to take on this role.

If exchanges are to be overseen by a government agency, the most sensible one is probably the SEC. Only, for that to work, it would likely necessitate a shift away from treating cryptocurrency as property, which is now the case from a taxation perspective to treating it as a security. As such, we’d need the IRS to change a host of its rules, or else we risk creating a cascade of conflicting policies that only serve to make the crypto market more confusing than it already is.

A final practical barrier to overseeing cryptocurrency is the anonymity it inherently brings with it. Creating rules is one thing; getting nameless entities to comply with them is another. If users are forced to unmask their identity to participate in these exchanges, we will again see a major appeal of cryptocurrency obliterated by a government agency that kills the very industry it claims to be looking to protect.

Nicholas Creel is an assistant professor of business law at Georgia College and State University.

Gavin Incrocci is an undergraduate student at Georgia College and State University who is studying cryptocurrency and cyber-law under Professor Creel.

The views expressed in this article are the writers’ own.

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