Coinbase founder and CEO Brian Armstrong attends Consensus 2019 at the Hilton Midtown on May 15, 2019 in New York City.
Steven Ferdman | Getty Images
FTX – until recently one of the largest crypto exchanges in the world – declared bankruptcy Friday after revelations about its business practices led to a surge of customer withdrawals, without sufficient funds to meet their withdrawals.
Coinbase I don’t have any material exposure for FTX, but I have a lot of sympathy for everyone involved in the current situation. It’s stressful any time there’s the possibility of losing a customer in our industry, and many people have lost a lot of money as a result of FTX’s struggles.
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It is also important to be clear why this happened – and what needs to change if we want to prevent it from happening again.
FTX’s decline appears to be the result of risky, unethical business practices, including deep-seated conflicts of interest between entities, and the decision to lend customers’ assets without their consent. It should be noted that this activity also occurs in traditional financial markets – and in fact, blockchain technology will facilitate tracking and prosecution over time.
After the events of this week, we have seen calls for more regulation of the crypto industry, with tighter restrictions on access and innovation. The problem is that, so far, US regulators have refused to provide clear, sensible regulations for crypto that would protect consumers.
Crypto regulations in the US have been hard to navigate, and regulators have so far failed to provide a workable framework for how these services can be offered in a safe, transparent manner. This means that a number of crypto-based financial products including loans, margin trading, short selling and other instruments that are fully legal and regulated in traditional financial markets are all prohibited in the US Entrepreneurial team building new decentralized products for fear of building out. United States for fear of litigation. They don’t want to break the rules, and now they don’t know what the rules are.
As a result, American consumers and sophisticated traders alike have been involved with risky, offshore platforms outside the jurisdiction – and protection – of US regulators. Today, more than 95% of crypto trading activity takes place on overseas exchanges.
Part of the reason FTX can do what it does is because it operates in the Bahamas, a small island nation with little regulatory oversight and the ability to oversee financial services businesses. Are regulators forcing FTX to conduct itself in that way? No, But they create a situation where FTX can take dangerous risks with no consequences.
Instead of putting in place clear guidelines for crypto, US regulators have focused on regulation by enforcement – going after US-based companies for not following the rules without actually establishing what the rules are. Coinbase itself became a victim of this practice earlier this year, when it SEC charged unregistered securities listing company, a an allegation we strongly deny. That’s bad for US competitiveness, and bad for Americans who lose money when overseas companies collapse.
All of this helps explain why heavier regulation will make the problem of crypto companies and crypto users going abroad worse. Instead, we need it smarter regulations that protect consumers and make the US a more attractive place for crypto companies to operate.
Despite the common perception that crypto companies don’t want to be regulated, many – if not most – companies have been working with policymakers for years. Those of us who care about the future of crypto want to create sensible regulation for centralized exchanges and custodians in the US and other regions.
In the long term, the crypto industry has the opportunity to build a better system using decentralized finance and independent wallets that do not rely on trusting third parties such as exchanges. Instead, customers will be able to trust the code and math, and everything is publicly auditable on the blockchain. Until then, however, regulators must establish clear rules that bring crypto back on-shore, encourage innovation, and protect consumers.
The US has always prided itself on being at the forefront of new technologies and industries. With more than 200 million global crypto users and countries starting to pilot digital currency programs and accepting bitcoin as legal tender, our crypto time has come.
Now, the US has a choice: lead by providing clear, business-forward regulation, or risk losing a key driver of innovation and economic equality.
Brian Armstrong is the CEO and Cofounder of Coinbase.