Cryptocurrencies conundrum Cryptocurrency
Back in the spring of 2018, we wrote a series of articles about cryptocurrencies, digital assets and tokenisation headlined “The Crypto Conundrum”. One of this series looked at the regulatory landscape around cryptos which was of course a work in progress and still is, however this week I was somewhat surprised to see what can only be described as anarcho-capitalist commentary online while discussing the QuadrigaCX fiasco and the subsequent regulatory position in Canada with regards to this. In the Wccftech Finance section we had a chat about this for our coverage of the topic and it occurred to me that other than the usual finance journalism rules around writing about instruments which somebody has an interest in, we don’t particularly have any editorial positions or stances on many subjects. Today, this changes.
The Wccftech Finance section now has a stated position that crypto and digital assets should be subject to regulatory oversight and will encourage this for several reasons which I’ll discuss here.
The success of the global economy is fundamentally grounded in capitalism. However as I wrote several years ago, unfettered capitalism has a tendency for a variety of reasons to lead to consumer detriment in several forms, one of those being the tendency for monopolies to emerge (not necessarily in every industry but certainly some important ones) and concentrate corporate power. Additionally, there is a general acceptance that there should be a balance between corporate and consumer power, as well as protections so that consumers do not need to educate themselves to the point of being experts in every given field before having the confidence to make a purchase, investment or other commercial decision. These basic principles give rise to a lot of the rules and laws which govern the world today and within that structure, regulation plays an important part.
Concerns that the Canadian financial regulator is having a “heavy handed response” and considering classifying some cryptos as derivatives (and of course regulating them as such) unless delivery is immediate upon completion of a trade are grounded in an anarcho-capitalist worldview and while there are plenty of positive arguments for a small state and limited governmental intervention in private citizen’s lives, this really isn’t one of them. Financial regulation has been built up over centuries and the general objective is one of consumer protection. Many of the arguments which are happening over the regulation of new asset classes today are arguments which have already occurred, time and again throughout history and which have been legislated for and regulatory bodies setup to oversee to prevent consumer detriment. Given that much of the world has contracted out of the concept of state pensions, private investment these days drives the ability of many people to retire after their career and private investment has (in major financial trading countries at least) a large amount of regulation aimed at ensuring that people’s investments don’t disappear in a puff of smoke.
Questions on Cryptos
I’ll reproduce here a very important list of questions which I included in the crypto conundrum regulation article I wrote that were posed by Jay Clayton (Chairman of the Securities and Exchange Commission in the US).
– Who exactly am I contracting with?
– Who is issuing and sponsoring the product, what are their backgrounds, and have they provided a full and complete description of the product? Do they have a clear written business plan that I understand?
– Who is promoting or marketing the product, what are their backgrounds, and are they licensed to sell the product? Have they been paid to promote the product?
– Where is the enterprise located?
– Where is my money going and what will it be used for? Is my money going to be used to “cash out” others?
– What specific rights come with my investment?
– Are there financial statements? If so, are they audited, and by whom?
– Is there trading data? If so, is there some way to verify it?
– How, when, and at what cost can I sell my investment? For example, do I have a right to give the token or coin back to the company or to receive a refund? Can I resell the coin or token, and if so, are there any limitations on my ability to resell?
– If a digital wallet is involved, what happens if I lose the key? Will I still have access to my investment?
– If a blockchain is used, is the blockchain open and public? Has the code been published, and has there been an independent cybersecurity audit?
– Has the offering been structured to comply with the securities laws and, if not, what implications will that have for the stability of the enterprise and the value of my investment?
– What legal protections may or may not be available in the event of fraud, a hack, malware, or a downturn in business prospects? Who will be responsible for refunding my investment if something goes wrong?
– If I do have legal rights, can I effectively enforce them and will there be adequate funds to compensate me if my rights are violated?
These questions are important because they are quite fundamental questions which modern financial regulation is designed to ensure that private individuals who invest in traditional asset classes like equities do not have to worry about. Furthermore, they are important because at some point in time, a bad answer to one of these questions caused private investors to lose money. As we all know, investing can result in money being lost but the basic point is that this would only occur on the basis of having an informed position and having a different point of view to other investors. Fraudulent activity shouldn’t be the cause of an investment loss and when it is, regulators and governments look at how that fraudulent activity was able to occur within the given legal and regulatory framework and attempt to make it more robust for the purposes of consumer protection. It isn’t ideal because the global financial system is quite a complex beast these days and schemes aimed at circumventing the rule of law are equally complex but the point is that the days where it was relatively easy for someone to scam a private investor out of their hard earned money are far behind us when it comes to traditional assets.
Unfortunately, when it comes to unregulated assets, those days aren’t so far behind us. Nobody is saying that laws and regulation are infallible but given the way they have been built up over time, the legal/regulatory equivalent of a mean time between failures (or MTBF to those with an understanding of technology!) is greater. How many times can you think of a legal/regulatory lack of oversight/laws that has led to a loss by private investors averaged out over the number of investors and amount of funds there are in traditional, regulated assets in the last five years? How about in unregulated digital assets? Here’s a clue, the number is going to be much higher for unregulated assets than regulated ones and these are exactly the reasons for financial regulation, to give investors a degree of protection that prevents as much as possible against the scenarios that regulators know can lead to consumer loss.
Regulation can absolutely be a burden and nobody is saying that the system is perfect, but in general the objective to protect consumers/investors is a noble one. This of course should always be balanced against regulatory services providing value for money and not stifling industry to the point of suffocation and valid businesses being unable to operate. An overabundance of regulation can be problematic but in general the current wild west landscape of cryptocurrency and digital assets, this is not a realistic issue. Anarcho-capitalists that rail against regulation in any form are as extreme an entity as those that advocate for centrally planned economies in all things. Reality should of course be somewhere in between and it is incumbent on those of us in the industry to ensure that the public is as aware as possible of the risks associated with a lack of regulation. For this reason, all future Wccftech Finance articles which touch upon crypto and/or digital assets will take the view that these assets should be regulated appropriately.