The Important of Regulated Markets: Crypto vs. Stocks
I have seen a ton of hesitation and general frustration in the crypto markets recently with the growing popularity of crypto currency as a portion of retail traders asset strategy. It is important to know the difference between regulated and unregulated markets when choosing where and if to participate.
With the FTX scandal continuing to dominate headlines, now is as good of a time as any to revisit the basics of market structure, regulation, and consumer protection (or lack thereof). The severe lack of structure and oversight both within FTX and the broader crypto industry as a whole has shed light on the importance of regulation within markets.
This is not to say that regulation to any degree is healthy or desirable – there is also a very real argument to be made that too much regulation can inhibit value and drastically limit economic growth. A good example of the delicate balance in proper regulation can be found by analyzing regulatory reactions to the financial crisis of 2008. While there were some very necessary and beneficial new proposals coming from that time, some actions went too far and actually did more harm than good. In any regulatory framework, balance is key.
When specifically looking at the crypto market and the lack of regulation, it’s clear that we are nowhere close to striking the right balance, and unfortunately the majority of damage has fallen on the consumer. The recent FTX collapse is the most recent and by far the biggest shock to the system, but it is hardly the first. Scams, frauds, and bankruptcies have been rampant, from the Celsius bankruptcy earlier this year to the multiple blockchain hacks (Wormhole, Axie Infinity, etc.).
FTX is a prime example of how the lack of regulation played directly into the collapse of the company and ultimately the historical losses for consumers. At a very high level, the company was taking customer money and feeding it to their sister company, Alameda Research, which is a crypto hedge fund (this never would have been allowed under the scrutiny of a regulated stock exchange). Furthermore, the founder of FTX, Sam Bankman-Fried (fitting last name, right?) took billions of dollars in massively over-collateralized loans based on over-inflated cryptocurrency prices, many of which FTX issued themselves (neither the loans nor the collateralization would have come close to allowable in a regulated market).
One example of how regulations can create safer environments, specifically for banks and exchanges, is through a reserve requirement. This effectively ensures that enough cash is set aside to meet potential spikes in demand or withdrawals. Had FTX been subject to a reserve requirement, the scenario likely would have ended much differently.
When thoughtfully structured to promote long-term investment and growth, regulation in markets is a backbone to consumer confidence and protection. Crypto markets are likely here for the long haul, but it is imperative to instill meaningful regulation around the companies that touch these markets to ensure a fair and equitable system for all stakeholders.
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