In 2021, crypto scammers racked up almost $14bn in fraudulent transactions, almost doubling 2020’s figures and setting a bleak new record for the crypto space.
Tech experts and crypto gurus are quick to respond that this is to be expected, given how many more people are now investing in crypto assets – an expansion in users, naturally, means an expansion in fraud. Indeed, a report published by Chainalysis in January 2022 asserted that fraudulent addresses made up just 0.15% of transactions in 2021.
For many, however, this doesn’t do much to ease anxieties – especially as 2022 has seen increased market volatility, as well as several high-profile crashes and scandals. Consequently, governments are paying closer attention than ever, and with all this in mind, it is likely that from 2023 onwards, we will see an increase in state-sponsored initiatives and regulations designed to offer investors better protection.
The “Wild West” of Crypto
Despite the crypto currency industry’s call for better regulation clarity and transparency, the very foundation on which it was built was, in fact, designed to avoid over-centralisation and regulation.
It’s not a surprise then that the very first and relatively early adopters of crypto assets were tech enthusiasts, libertarians – and criminals. Combine this fact with the very public instances of fraud, insolvency and a general lack of transparency that we have seen over the last few years, and it’s easy to see why public trust in crypto is so fraught.
In 2021, US Securities & Exchange Commission Chair Gary Gensler notoriously irked many in the crypto industry by comparing it to the Wild West. Gensler has since been vocal in his belief of stable, well-regulated digital securities and has been a key player in the US’ development of regulation strategies.
A study by Edelman in 2020 found that 6 in 10 people believed cryptocurrency needed better regulation, and this number was even higher among people who hadn’t yet invested in crypto. The study asserted that the call for regulation was higher when trust was diminished:
Indeed, the attitudes of prolific crypto investors doesn’t do much to help matters. Crypto owners and investors frequently use words like “draconian” to describe regulation that, in some cases, hasn’t even been drawn up yet, and this resistance to regulatory oversight naturally has people wondering what they are trying to hide.
Crypto Regulation in 2022
2022 has been a rocky year for the crypto world. High-profile insolvency cases and repeated crashes of the market are fuelling uncertainty, and as global economic issues begin to bite, potential speculators will be much more focused on investments that can deliver returns.
“The price of Bitcoin is not related to economic fundamentals, but sentiment is. Risk sentiment is going to get a lot worse – the market isn’t pricing in how aggressive the Fed’s going to get.” – Noelle Acheson, head of market insights at crypto lender Genesis Global Trading.
The crypto industry took another hit recently when Bahamas-based crypto exchange FTX imploded in spectacular fashion. A run on deposits left it deep in the red, and mired in allegations that creator Sam Bankman-Fried lent his customer’s investments to a hedge fund that he owned, and that traded on the FTX platform.
Despite this, there was more crypto buy-in from companies during 2022. Notable asset management giants such as abrdn and BlackRock have taken the plunge:
This didn’t fall beyond the notice of several state leaders, who are becoming interested in the tax potential of crypto earners as a means of shoring up struggling economies.
In the US for example, new stablecoin currencies were trialed, with their value pegged to that of the US dollar. The most promising, Terra/Luna, crashed publicly in mid-2022, but this did little to dissuade US lawmakers from looking for a viable stablecoin solution.
Across the pond, the European Union is also taking steps towards crypto regulation, touting its Market in Crypto Assets (MiCA) bill that was due to go through its final voting stage late this year. Frustratingly, the vote has been pushed back to February, with EU lawyers blaming the sheer amount of legal text to sift through.
Stefan Berger, a member of the European Parliament responsible for procedural handling of MiCa, is quick to point out that the bill recently sailed through its trialogue-stage vote. However, with regulation planned to go into effect in 2024 at the earliest, it looks to be a slow, arduous process – something that will undoubtedly frustrate business owners and investors.
Similarly, the UK is taking steps to create its own crypto regulatory frameworks. The government has expressed its desire to make the UK a “global hub for crypto asset technology” as it tries to construct a more competitive post-Brexit financial sector.
The UK government insists its upcoming “Financial Services and Markets Bill” will fill the void and embrace opportunities such as creating stablecoin assets, limiting the amount of foreign companies selling into the UK and enabling a broader range of crypto investment. These sound like the right noises, but the bill’s current iteration seems more focused on the process of reclaiming former EU powers and bolstering the UK’s financial regulators, with little detail provided as to how the average investor could be safeguarded.
Governments around the world are trying to catch up with regulation, but as 2022 draws to a close, many still see crypto as susceptible to fraudsters and bad faith actors.
What more can be done to regulate the Crypto Industry?
In 2014, there were attempts to regulate the growing number of firms offering cryptocurrency services – however, most regulators were either not paying complete attention or were left rather confused and powerless due to Bitcoin’s concept of “decentralization”.
In 2022, we finally started to see meaningful plans for regulating the crypto market. In March, Joe Biden signed an Executive Order calling for more regulatory framework based on financial stability and responsible innovation. Just a few weeks ago, the White House released its first Comprehensive Framework for Responsible Development of Digital Assets.
At present, there’s a gap in crypto asset and currency regulation which countries across the world are scrambling to fix – a gap which is actively contributing to fraud and overall weak investor protection, when it comes to crypto asset distribution and trading.
Bankman-Fried is a particular cautionary tale, as he had been known in Washington DC as an advocate for crypto regulation. His subsequent confession that this was “PR masquerading as do-gooderism” should be a warning to all of us that regulation needs to come from external powers, which – hopefully – would be driven by fairness and transparency as opposed to wealth creation and self-interest. Any regulatory framework created by a state should include a clear path to goals that benefit the most people, or at least those at the most risk.
Finally, increased regulation should mean less market manipulation and an overall safer crypto asset and currency ecosystem where fraud and theft, hopefully, will hopefully be reduced and eventually, eliminated.
In short, countries need to up their game and play their part in devising robust regulatory frameworks, whilst enabling and nurturing innovation. This should lay the groundwork for an effective self-regulatory standard for crypto assets – something which has been at the core of, at least, US legacy financial markets since the very beginning.