The bankruptcy of crypto exchange FTX (the 10th largest bankruptcy in US history) took down at least 130 cryptocurrency companies associated with the firm and the expectation is that more distressed assets will still emerge. Adding to the problem, one day after declaring bankruptcy a mysterious group of hackers which may or may not have been FTX insiders, seem to have stolen $700 million of customer assets. What a mess.
This is the third time now that retail investors have been on the receiving end of a cryptocurrency exchange or centralized lender going bankrupt. Regulators have dropped the ball, clearly. This time, since Tom Brady and Giselle are involved, the stakes have been raised.
Most other developed economies already have cryptocurrency laws in place designed to protect investors and to safeguard exchanges. Not here in the United States. The SEC under Gary Gensler’s lacking leadership has continued to miss opportunities to enact even the most basic investor protections. The SEC’s highest profile regulatory event for the year? A fine for Kim Kardashian for promoting a crypto project. Gary Gensler, please go back to teaching, #timesup.
The silver lining, if you are inclined to look for one, is that the United States will get crypto regulation sooner than we were expecting. Last week if asked we would have said that we were not expecting to see meaningful progress on crypto regulation until 2023. However, with the midterms now behind us and the carnage so prominent, cryptocurrency regulation just moved up on the legislative agenda.
There are some very easy bills that can and will be passed by Congress this year. One of these is the “Stablecoin Transparency Act”. This piece of legislation has bipartisan support, and it will require stablecoins to be regulated similar to the way money market funds are regulated. We believe this will pass this year and with Wall Street’s favorite stablecoin USDC now a part of Apple Pay, the sooner the better.
Looking forward, there is a more comprehensive bill in front of Congress called the “Lummis bill” cosponsored by senators Kirsten Gillibrand and Cynthia Lummis. This will make important progress in regulating exchanges and digital asset service providers. It would have prevented the FTX bankruptcy from decimating users. It includes the commonsense requirement that crypto exchanges segregate client assets from firm assets similar to the requirements already in place for traditional exchanges. We expect that this bill will go through committee and markup this year and be signed into law early next year.
It is necessary to get this regulation in place. Institutions are preparing for a blockchain built future. They are adding blockchain employees and adjusting business structures to gain market share in this emerging industry, but institutions will not make further significant investment without a clear regulatory framework.
The industry is certainly learning a lot in what seems to be the hardest way possible. However, do not concede any ground to the naysayers who say that maybe crypto is going away. It’s not. At its core, crypto represents a “better, faster and cheaper” solution for businesses and, “better, faster and cheaper” will find a way to profitably assimilate into our capitalistic society.
There’s more to crypto than its exciting and novel technology. When used correctly, crypto brings its users an expansion of personal liberty and freedom. Heavy-handed regulation will be a very real threat to crypto achieving this part of its world bettering potential. The jury remains out on whether those value propositions will be fully realized or regulated out of existence. Let’s encourage our lawmakers to regulate with urgency but also with discretion.
Written by John Sarson, CEO
Disclosures: Not investment advice. It should be assumed that Sarson Funds or its affiliated managers hold positions in all projects that are discussed. It is not possible to invest in any project directly through Sarson Funds, Inc. or its affiliated managers. Any investment product offered by managers affiliated with Sarson Funds should be assumed to be only available to Accredited Investors and subject to the individual terms and conditions of that offering including but not limited to those eligibility requirements associated with U.S. Securities Regulation D, section 506c. Talk with your financial advisor before making any investment decisions or have them contact Sarson Funds directly at info@sarsonfunds.com
