There was a thaw in the crypto winter yesterday, a glimmer of celebration, cloaked in schadenfreude, at the House Financial Services Committee hearing yesterday. Securities and Exchange Commission (SEC) Chairman Gary Gensler, sometimes referred to as crypto’s favorite whipping boy, testified before the committee yesterday.
Crypto twitter cheered when a group of Republican Congressmen laid on crypto’s chief antagonizer, skewering his approach and failure to provide regulatory clarity. They pointed to his shaking hand after Rep. Patrick McHenry (R-NC), who received substantial donations from crypto-affiliated political action committees for his re-election bid last year, grilled him on the regulatory status for Ethereum’s native token, ether. [If they’d been astute observers of his earlier testimonies, they would have noticed that Gensler’s shaking hands have nothing to do with Ethereum’s status or Rep. McHenry’s questioning].
As far as political theater goes, yesterday’s drama in the House was effective sideshow for a beleaguered ecosystem that has had little to cheer in the current news cycle.
What Regulatory Clarity?
The bigger question here is whether regulatory clarity could have helped prevent crypto’s many scandals.
Say, could clear definitions about token status have helped prevent the collapse of FTX – an exchange that commingled funds and frequently pumped up the price of its native token to keep investors profitable?
Or could they have prevented lending firm Celsius from duping customers with promises of extravagant returns or hijacking ownership of their crypto through its user agreement?
It is not likely.
The problem with crypto is not the absence of regulatory clarity about its so-called innovations. It is that old fashioned human foible – greed. There are plenty of examples, recent and past, that testify to crypto’s propensity to play hard and fast with existing rules to mint profits in fiat currencies, all under the guise of providing novel services or technology.
In fact, crypto businesses thrived, and their valuations ballooned, in the freewheeling years of regulatory uncertainty. That uncertainty enabled them to forge relationships, that wouldn’t have been possible with clarity or knowledge about regulation, between their entities and adopt questionable practices to boost their bottom line.
Regulatory Arbitrage
Caution is not an advisable trait for startups; but then neither is crime. Recent complaints by regulatory agencies have provided ample evidence, in the form of texts and emails, that crypto entrepreneurs have a flippant approach to breaking the law.
After yesterday’s hearing, Coinbase CEO Brian Armstrong resorted to brinksmanship, threatening to leave U.S. shores for other jurisdictions. The company has already been served with a Wells notice.
But regulatory arbitrage may no longer be an option for crypto businesses. The unraveling of its ecosystem last year has put regulators in other jurisdictions on alert about crypto’s shenanigans. Likely, they will have many questions, if and when crypto businesses open shop.
The industry’s “innovations” are also powered by a slew of backend services offered by American companies, such as Amazon Web Services (AWS). This means that there is no guarantee that companies operating outside U.S. shores are beyond the reach of its regulators.
In heaping their current woes on regulatory agencies, the crypto industry has confused issues. Regulatory clarity does not equal to accountability or good business practices. It is not the SEC’s job to chase the crypto teen after it throws a fit about rules. The teen must learn to be accountable for their actions.