Commentary: Reform crypto before it reaches a crisis point

Third, if regulators get involved, they should require stablecoin issuers to provide audited, detailed statements about their assets and impose big reserve requirements. That sounds obvious. But it is notably not what Tether, the largest stablecoin issuer, has done.

Fourth, regulators should demand that crypto exchanges uphold basic listing standards. And finally, clarity is urgently needed around custody, given that the exchanges are not just acting as platforms for cutting deals, but often holding customers’ assets as well.

CRYPTO NEEDS TO BE KEPT IN CHECK

This oft-ignored concentration of power makes a mockery of the decentralisation mantra that supposedly drives the crypto dream (and, as I recently noted, is just one contradiction in this sector’s creation mythology).

But it also creates a practical risk: Failure could spark market panic. Some small non-US jurisdictions have custody rules that protect investors if an exchange goes bankrupt. Not so on a federal level in America, as Coinbase executives were forced to admit to investors last week. This definitely needs to change.

These ideas are not remotely revolutionary; similar principles have been imposed on other areas of innovation before. Indeed, many were laid out clearly in a report issued by the President’s Working Group on Financial Markets seven long months ago, which called for “urgent” legislation to address the mounting risk.

But since then, Congress has notably failed to act; despite the fact that this is a rare topic on which there is bipartisan interest. Most mainstream crypto players have shrugged off the issues as well. For example, even though the issuer of Tether was fined for accounting malfeasance, investors have continued to use the coin.

Hence that Goldilocks question. If the industry and policymakers now (belatedly) react to being burnt by introducing a sensible framework, the world will finally be able to see if crypto can become something more than a fringe wild casino, with real uses. If not, expect more scandals, shocks and investor pain. In my mind, the jury is still out as to which scenario prevails.