Cryptocurrencies were developed over ten years ago. When they were first introduced, they were more of a novelty item. Now that they have evolved into a viable financial entity that is continually gaining momentum as a valuable form of currency, the need for regulatory guidelines has become mandatory. Multiple challenges must be dealt with when trying to develop a regulatory framework.
Without regulation, there is little to no control over maintaining consistent values for each type of currency. With the different types of cryptocurrency evolving so quickly, it’s difficult to establish one universal framework of guidelines.
Binance and Tether
Binance and Tether are two crypto companies that have become very popular but that still have regulatory question marks. Binance is a cryptocurrency exchange where customers can buy, sell, or trade different types of cryptocurrency like Bitcoin and Tether. It is the largest exchange in the world by volume. Tether has caught the eye of many investors because it’s very good at holding a peg to the US dollar.
While these seem like great properties to have on their own, the problem is that many regulators are skeptical that Tether actually has the reserve funds that they claim back the value of their stablecoin. By extension, because Binance relies strongly on Tether for their crypto trading markets, a downstream effect of Tether insolvency could be that Binance could be insolvent as well. Currently, any claims about these issues is pure speculation, but regulators are increasingly raising flags. Should the worst case scenario play out, it would be a black swan event for crypto.
Crypto Is Evolving at an Explosive Pace
Cryptocurrency is evolving so quickly that developing a regulatory system to manage it on a global level is close to impossible. Regulators must learn the necessary skills and find the talent to keep up with the ever-changing currency.
Monitoring thousands of actors who are not subject to any form of reporting requirements is difficult, especially when the amount of data is limited and the reporting cycles are sporadic at best. In order for the regulators to be effective at monitoring various types of cryptocurrencies, their resources and talent base would have to increase dramatically.
Not Enough Manpower to Monitor the Currency
At this time, there are not enough people who have been sufficiently trained to be able to monitor cryptocurrencies effectively at a global level. While cryptocurrency easily attracts the attention of banks, lenders, commodity brokers, and others, few have the manpower to closely monitor cryptocurrency in a framework that is universal to everyone.
Because all the crypto networks are operated within their own unique framework, it is difficult to monitor even the simplest transactions. In order for monitoring to be effective, a universal regulatory system must be put in place and all crypto users must agree to follow the guidelines.
No Globally Recognized Terminology
One of the most difficult issues facing cryptocurrency exchanges is that there is no globally recognized terminology in place. The entire catalog of activities and products involving cryptocurrencies can fall under the term crypto-asset which is very misleading.
When dealing with digital currencies, the primary actors include protocol developers, miners, and validators. With no universal governance in place and a mix of terminology, it can be difficult to communicate what is going on during specific transactions. This makes it hard for traditional financial institutions to work directly with most types of cryptocurrency.
The FTX Drama
After it was discovered that FTX founder Sam Bankman-Fried had misappropriated millions of dollars from the company, many people were surprised at how easily he had accomplished the task. There was no high-tech, overly complicated scheme. According to John J. Ray III, it was simply a case of embezzlement.
Ray testified in front of the House Financial Services Committee that Bankman-Fried had defrauded his investors and clients, using their money for his own monetary gain. With few regulations in place in the crypto universe, there were very few ways to accurately monitor his actions.