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The push by Regulators for more oversight in crypto isn’t administrative overreach; it’s based on the wisdom of experience and longtime proven effective policies at regulated securities and commodities exchanges.
Calls for regulation of the crypto space are based upon well established guidelines governing … [+]
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The unfolding FTX saga is validating old-school thinking in the finance world: time-tested regulatory policies currently in place at established exchanges like the NYSE, NASDAQ
NDAQ
, the CME Group
CME
and others, are in place for a reason. These policies evolved and were implemented over time to create safety and stability for investors; their roots lie in experiences gleaned by the entire financial industry over generations.
One example is that customer funds on regulated exchanges are segregated. Regulated exchanges use their own capital for their own purposes; this capital is separate and apart from customer capital; customer capital is generally segregated and reserved for the specific uses for which customers have entrusted it to the exchanges. If a customer on a regulated exchange gives money to that exchange for the purpose of making an investment in an asset like a stock or bond, that money is held and treated separately from the exchange’s own money; the exchange cannot take customer capital and use it to fund risk investments of its own. Unregulated exchanges, like FTX and other cryptocurrency exchanges, do not currently have the level of regulatory oversight that exists at traditional stock and commodity exchanges within the U.S.
It is no coincidence that the offshore U.S. FTX entity, FTX International, is where the current turbulence first manifested itself. Non-U.S. entities face far less regulatory oversight and restriction than U.S. entities, and it appears that customer assets of all kinds were transferred by FTX International to its sister company Alameda Trading for Alameda’s own risk purposes. That’s a clear no-no in U.S. regulated markets. It’s also a very improper thing to do, with or without regulatory oversight.
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If my four decades of commodity experience have taught me one thing it’s this: amongst the characteristics of truly smart people is the ability to learn from history and the mistakes that other people have made before. Not repeating the mistakes of others saves a lot of time and money, i.e., one does not have to live only by one’s own failures to gain the wisdom of experience. Learning from the mistakes of others is really effective at avoiding simple mistakes of one’s own, of errors in judgement, and of bad behavior in general. Age and the passage of time makes this obvious to most people.
Unfortunately the cryptoverse is different than many corners of the financial markets. The world of crypto is filled with wet-behind-the-ears twenty and thirty-somethings with no experience, no reverence but for their own egos and intellectual abilities, little to no respect for history, and apparently very little common sense or moral direction. Not exactly a great recipe for long term success, but these qualities do make it easier to cook up a pot full of honest mistakes, stupid mistakes, “errors in judgement” and, in the worst of all scenarios, outright theft and fraud. As time passes we will see which of these are true in the case of the FTX fiasco.
In the meantime, as lawmakers and regulators clamor for more regulation of the crypto space, the cryptoverse would do well to listen and, within reason, acquiesce. Investors and the cryptocurrency markets will benefit in the long run.
