Why The Crypto Industry Needs to Self-Regulate – Now

After perpetrating what appears to be one of the biggest Ponzi schemes of all time – out-Madoffing Madoff, as it were – Sam Bankman Fried has been arrested, indicted and will likely serve time. And thank goodness for that.

SBF was just the most prominent huckster who took advantage of eager investors in new technology. His criminality, however, shouldn’t negate the potential in cryptocurrency – the ability to freely trade assets based on their real, market-determined value, without the involvement of central banks and government monetary policy.

Especially in light of these bad actors, we need to think more about the role of governance when it comes to crypto and other alternative digital assets. Regulation - and its subsequent enforcement-  should focus on providing investors with a layer of protection from the scammers and fraudsters who think nothing of cheating thousands or even millions of their savings. But is the government the best agent for that regulatory enforcement?

If there is one positive thing to emerge from the FTX scandal – as well as the numerous, less famous scandals that have tainted the crypto universe in the past year – it's the likelihood that the government realizes that regulation is needed. Among those calling for regulations is US Treasury Secretary Janet Yellen, who herself saw fit to call for regulations in the wake of those scandals; while political leaders and regulators around the world are making practical plans to develop regulatory frameworks for crypto sales and trading. 

With that, we need to be realistic; the wheels of government often turn slowly, and the crypto industry – both legitimate players and scammers, as well as crypto investors – are not going to wait for the legislative process to be completed. They don’t have time to wait. Crypto is a large industry, worth nearly a trillion dollars today (even after the horrible losses of 2022), and it continues to grow, even as the gory details of SBF's nefariousness continue to be revealed. 

The best thing the industry can do – for itself, for investors, and even for the government – is to develop its own regulatory framework, one that will have strong sanctions for violators of the rules, supervised by institutions (perhaps banks) that will ensure fiduciary propriety. Self-regulation is probably the best idea for everyone involved; as many politicians don't understand crypto, and many of those that do have a distinct dislike for it. 

And recent revelations indicate that some of those less-than-ethical members of the crypto community contributed significant funds to both parties in the recent midterm elections – calling their ability to legislate fairly on the matter into question. And enforcement efforts by government agencies based on rules already in place (based on SEC digital asset rules) have not had the desired protective effects.

If the industry produces viable, actionable, fair, responsible, transparent – and enforceable – rules for itself, based on the realities of how crypto works, it will thus produce a much more effective and safe regulatory system, one that will prevent excesses by would-be corrupt crypto moguls, and ensure that investors will be operating on a fair playing field. What’s important is to develop a system that will harness the true innovation of a digital, verifiable means of financial exchange - and not a system that will have that potential regulated out of existence

Those regulations should be developed based on the experiences, needs, and conditions of investors, miners, exchanges, and all other relevant parties, perhaps by an umbrella organization that vets members to ensure that they are willing and able to subscribe to voluntary and specific standards of behavior – as well as penalties for violations. With that acceptance, and the development of those standards, the umbrella organization can provide a seal of approval, which all parties, especially investors, will be able to rely on. Those kinds of regulations will help not only to develop safeguards against bad actors, but also ensure development of an ecosystem that can add value to a new asset class, and develop new financial tools, along with means of trade that are global, trusted, and secure.