Following the FTX crypto exchange collapse, Changpeng Zhao, CEO of Binance, has likened the collapse to the financial crash of 2008. Comparing the two is “probably an accurate analogy”, he explained at B20 Indonesia. The crash has already affected other major cryptocurrencies, from Bitcoin, which has dropped close to 2020 levels, to Ether, down 20% in a single week—triggering market turmoil.
More stringent crypto regulations on the horizon
In the wake of the 2008 financial crisis, the G20 marshalled its forces to strengthen the global financial system, implementing stricter risk management frameworks, improving trade reporting and exchange trading, and assessing global data gaps. The group introduced global Legal Entity Identifiers, forced firms to disclose risks more transparently, and started to closely monitor SIFIs, or “systemically important financial institutions”.
Now, regulators may try to enact similar regulations for crypto markets in the wake of the FTX crisis. In the US, the Securities and Exchange Commission (SEC) has already hinted that the collapse may be a catalyst for imminent reforms, with SEC Commissioner Heidi Peirce stating that crypto needs to “take some basic lessons from traditional finance”.
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Creating a new regulatory blueprint for crypto markets
But can’t regulators just take the blueprint for traditional financial regulations and apply it to the decentralised world of crypto? Not exactly. As Zhao noted at the B20 conference, crypto and traditional finance have some fundamental differences. As a result, groups like the International Money Fund have started to explore regulations for the crypto market.
In a recent September 2022 report, ”Regulating the Crypto Ecosystem: The Case of Unbacked Crypto Assets”, researchers Parma Bains, Arif Ismail, Fabiana Melo, and Nobuyasu Sugimoto urged IMF policymakers to avoid “broad bans on crypto assets” in favour of more targeted action steps: addressing core crypto vulnerabilities, such as crypto wallets and centralised exchanges, restricting more risky crypto activities, and developing a global regulatory taxonomy.
Overall, the researchers concluded, regulators should license and authorise crypto asset service providers much like traditional finance: Systemically important crypto providers should face stringent requirements, supervision, and international guidance.
Industry leaders look to lead regulatory efforts and work with the government
With potential regulations close at hand, major crypto exchanges and industry leaders may want to prove to regulators that the industry isn’t the wild West. As the IMF’s Fintech Notes acknowledges, quick-fix restrictions on crypto could backfire, “stif[ling] innovation”. If crypto exchanges and platforms collaborate with government agencies to develop coherent, long-term regulations, however, they may be able to develop measures that leave room for them to innovate.
So far, several crypto exchange CEOs have backed the push towards regulation. “As the industry players, we should be more vocal about [regulation]”, argued Zhao, Binance CEO, at the B20. Coinbase CEO Brian Armstrong has also spoken out, continuing to criticise the lack of “regulatory clarity” in the US. And although Armstrong is concerned that the collapse of FTX will affect relationships with regulators throughout the crypto industry, he thinks that industry leaders and government can still make combined progress. “There’s a lot of reasonable people in government,” he said. “[W]e can find common ground.”
Lead the way in creating stronger crypto regulations
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