Superficial Regulation Is Key Cause for Cryptocurrency Scams, Thefts and Lawsuits

Propublica
27 Aug 2019

Continued global regulatory uncertainty and inconsistency are the biggest factors that are causing scams, thefts and lawsuits in the cryptocurrency sector.

The longer regulatory authorities drag their feet for crafting thoughtful, comprehensive and balanced regulation related to all crypto related activities, the more scams, thefts, frauds, illegal schemes, lawsuits and bad things in general will continue to happen across the world in this sector. 

In the last few months, the number of cryptocurrency related scams, thefts, bankruptcies and lawsuits have increased. Just scan the news headlines, and you will encounter stories about exchanges getting hacked, users getting scammed, ICOs that siphoned money without delivering anything, exchanges becoming insolvent, etc.

Yes, we want the regulatory authorities to be dogmatic in their enforcement approaches, but if they only do that without updating and clarifying the existing regulation, it is a recipe for disastrous consequences at several levels.

Applying existing regulatory frameworks to the novelties of the blockchain, tokens and cryptocurrency is possible, but it is subject to various grey zones of interpretations leaving blind spots and uncovered areas that are causing these undesirable outcomes:

– Scammers are able to operate because exchanges are loosely regulated

– KYC and AML practices can leave a lot to be desired because they are either not enforced or their requirements are poorly document 

– Many exchanges don’t provide proper accounting activity reports (because they don’t have to)

– Enforcement authorities are not up to speed on tracking and detection software 

– Asian exchanges are seen as a more permissible environment with loose regulatory constraints

US-based exchanges generally hold themselves to high operating standards by abiding to self-prescribed set of operational principles (eg. the Virtual Commodity Association), or just knowing that the SEC, CFTC, FinCEN and other regulators are watching this space like hawks. Switzerland’s FINMA runs a tight ship pertaining to clear regulation, as everything goes through them. Canada had very loose and fragmented regulation, which was a factor that allowed QuadrigaCX to run their scam under the radar of detection. That said, I am worried about many Asian exchanges that seem to wiggle their way out of strict operational regulation. 

The boundary-less nature of cryptocurrency-based financial transactions has pierced through the previous regulatory walls. This is good for freedom of choice and levelling the playing field for consumer access, but these porous boundaries are also letting-in the bad actors alongside the good ones. 

Of course, we need to maintain the global nature of this new financial system open, but we also need to put added operational safety requirements so that the good that emerges far exceeds the bad that comes with it. 

What we need more of:

– Acceptable and clear frameworks for the variety of crypto-token creation ideas

– Exchanges that can be trusted via certification to ensure they adhere to specific operating standards

– Crypto instruments that integrate with current systems in order to reach the masses in a legitimate way

– Bank accounts that accept crypto transfers and not treat crypto transfers with disdain, just because they don’t fully comprehend it, or haven’t adapted to it yet

Failing these progressive changes, we would be pushing more of the activity to other jurisdictions that offer lower barriers of entry. The fact that the Philippines has already granted licenses to 41 crypto exchanges and trading businesses is both interesting and scary at the same time. 

When it comes to trust and safety in the global financial markets, generally, the Western world has lead with their standards, and others follow them. In the crypto world, the reverse is happening. The “standards” are coming from non-Western (or advanced economies) jurisdictions. Asian exchanges are taking the path of least resistance, doing the minimum required in many cases. Let’s hope that this doesn’t become the new standard because some of these standards are loose, and often surrounded by double standards. 

The irony of the situation today is that western regulators are pointing to these excesses and using these bad things as a pretext for more radical regulation, instead of taking a more thoughtful approach, less sketchy, and with more detailed reforms.

Will the local Western regulators elevate their game and realize they need to work together to raise the bar for everybody concerned? Or will they continue to allow a laisser-faire for whatever happens outside of their jurisdictions, while they take tepid steps to regulatory reforms in their homes?

When regulators know little about a given subject, they won’t do the right thing. This applies to anything,- food, alcohol, roads, schools, etc. There are almost no subject matter experts or thought leaders from the regulatory side that have shown real depth of knowledge, innovative thinking and fresh strategies. Christopher Giancarlo, the recently departed CFTC Chairman and SEC Commissioner Hester Peirce are potentially the few exceptions, but they are a minority voice of reason for progressive thinking.

The current state of global regulation in cryptocurrency cannot go on. We have a Balkanization of regulations with a variety of standards, classifications, rules and practices

Sadly, this is the worst situation to be in.

(Source : http://startupmanagement.org/2019/08/27/superficial-regulation-is-key-cause-for-cryptocurrency-scams-thefts-and-lawsuits/)