The FTX Collapse and the Future of Crypto Regulation in the U.S.

In the Brief:

  • US policy punished Kraken, Coinbase, Paxos, Binance to hurt Sam Bankman-Fried, causing a delayed regulatory framework.
  • Politicians' involvement led to regulation-by-retribution resulting in a high risk of operating in the US.
  • Blockchain may pressure politicians, but the current standard is unsustainable, causing an exodus of the crypto business.
  • The blockchain idea could avoid losing US economic and technological leadership by creating a framework that does not depend on middlemen, allowing innovation and investment.

3 - 5 minute read

The U.S. crypto policy has come under intense scrutiny following the regulatory enforcement actions taken against the industry. Experts say that the crackdown against Kraken, Coinbase, Paxos, Binance, and others was driven significantly by a desire to punish Sam Bankman-Fried, the founder of FTX. Bankman-Fried’s extensive wrongdoings have set back the chance of a clear regulatory framework, leaving the SEC to continue being a law unto themselves.

With the biggest issue being that the US is now losing all capacity to shape this inherently borderless technology’s direction, experts warn that digital asset and blockchain innovation will depart for friendlier shores. This is not only counterproductive, but U.S. industry leaders of all stripes have been warning of an exodus of crypto businesses, leading experts to believe that the U.S. is destined to lose its prospects to attract crypto investment, entrepreneurship, and innovation.

Emotions, specifically anger, and embarrassment played a huge role in driving policy actions, leading to a dangerous politicization trend in U.S. crypto policy. The FTX fallout, which sent shockwaves through the crypto industry at large, saw politicians – mostly Democrats, but also some Republicans – as beneficiaries of FTX political donations. This led to a desire for regulators to punish Sam Bankman-Fried and drove a newly nutty standard of regulation-by-retribution.

The regulation crackdown is seen as a “war against crypto” by those in the industry. As a result, crypto business people are seeing the slew of criminal and civil charges as a sign that it’s now too risky to keep operating in the US. The challenge of regulation-by-enforcement is that it doesn’t create a clear regulatory framework, leading to regulatory action that seems well-sequenced to not be coincidental, diminishing the trust within the industry. In turn, no other developed economy is taking as hostile a stance toward this industry, leading industry leaders to warn of an exodus of crypto businesses.

Who’s Governing the Governors?

“D.C. is Veep. It’s not House of Cards,” said Sheila Warren, CEO of the Crypto Council for Innovation, during Coindesk’s Money Reimagined podcast recording. The human fallibility of our governing institutions is prone to absurd moments like the current regulation crackdown. These human failures led French philosopher Montesquieu to conceive of the “separation of powers” doctrine, inform the blockchain idea, initially identified in the Bitcoin whitepaper, that we need a system for managing money, assets, and information that’s not beholden to “trusted third party” middlemen.

The technology offers people the option to exit into alternative, decentralized economic systems and how, indirectly, this could put pressure on our politicians to lift their game. The worst outcome from the regulation crackdown could put the U.S. and its model of market democracy at greater risk of losing economic and technological leadership. However, the technology may also impose a self-correcting force on the political system to avoid the worst outcomes.

The U.S. crypto policy is in dire need of clear, inviolable rules of governance to foster innovation and attract investment. The current regulation-by-retribution standard is not sustainable, leading to a loss of trust within the industry and the exodus of crypto businesses. The impact of the fallout at FTX should not be ignored to create a clear regulatory framework and improve the perception of the industry. The blockchain idea and the separation of powers doctrine may inform regulators in creating an ecosystem that is not wedded to “trusted third party” middlemen.

Disclaimer: The content in this article is provided for informational purposes only and should not be considered as financial or trading advice. We are not financial advisors, and trading carries high risk. Always consult a professional financial advisor before making any investment decisions.

Leave a Reply

Your email address will not be published. Required fields are marked *