Crypto – regulate to consolidate

As investors and the authorities pick through the rubble of the now defunct FTX, one thing we can be sure of is that blow ups of this ilk and those involving so called pioneers earlier in the year, bring down the reputation of the cryptocurrency ecosystem. Trust is eroded and, questions are raised about whether the asset class really does have a long-term sustainable future.  

Whilst this is clearly another setback for the retail segment of the crypto marketplace, we remain convinced that blockchain technology and cryptocurrencies will pervade traditional capital markets from an institutional perspective. What we need, now more than ever, is for the industry to come together and, in the absence of regulatory foundations, rebuild trust through robust risk management, improved transparency and strong corporate governance.  

Whilst regulation is unlikely to have completely prevented the latest incident, carefully considered regulation, designed to liberate the institutional market and protect the retail investor, would be a big step forward for the cryptocurrency market.  

In the US, it’s encouraging that there are signs that regulatory progress is in the pipeline. Policy makers are approaching the issue from a number of different angles, which shows that there is intense focus on creating a framework which provides financial innovation, flexibility, and importantly, investor protection, all of which build greater credibility in the asset class. 

Across the pond in the UK, the Financial Services and Markets bill is currently being considered, the Treasury has an inquiry underway on whether the Government effectively understands the opportunities presented by crypto-assets and the Crypto and Digital Assets All Party Parliamentary Group (APPG) is focused on the approach the Government is taking to position the UK as a global hub for crypto.  

In Singapore, the Monetary Authority of Singapore is broadening its crypto regulation, particularly from a licensing perspective, examining how to apply technologies to solve issues including cross-border settlement. 

Whilst all of this progress is encouraging, we’d implore regulators across the globe to work with the industry to ensure frameworks are robust without stifling flexibility and innovation. Policymakers and regulators need to have full understanding and be clear on industry strategy, as well as what they are regulating and why – consulting the industry throughout the entire process is the best way to do this.  

The crypto industry cannot stand still in this period of flux. We are wholly supportive of the efforts of industry associations such as the Global DCA, working to bring firms in the ecosystem together to agree on a certain set of fundamental core principles. Principles that establish business practices that at their core seek to avoid, or at least mitigate, the occurrence of business failures that impact customers and the financial market at large. 

We believe that despite these setbacks, crypto will continue to flourish into a mainstay of financial markets. 

Afterall, during challenging periods for emerging technologies and industries, only the strongest survive. Market share will come to others in the industry who are established, trusted and have a long-term future to play in the ecosystem. This is unequivocally a good thing.  

The internet did not suddenly vanish after the boom and bust of the early 2000s – instead what emerged was a cohort of companies that revolutionised and transformed the way we do business, talk to friends and family, do our shopping and ultimately live our lives. The same can be true for the cryptocurrencies that weather the storm.  

Let’s use the challenges that face our industry to build a stronger, safer and more efficient industry. Once, and only when we achieve that, will people and businesses follow. Let’s get to work.  

LMAX Digital is part of the LMAX Group, an independent operator of multiple institutional execution venues for FX & crypto currency trading.     

We've been at the forefront of the institutionalisation of crypto trading since 2018 - with a 100% exchange uptime - ensuring orderly markets during times of the highest volatility.    

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This post is commissioned by LMAX and does not serve as a testimonial or endorsement by The Block. This post is for informational purposes only and should not be relied upon as a basis for investment, tax, legal or other advice. You should conduct your own research and consult independent counsel and advisors on the matters discussed within this post. Past performance of any asset is not indicative of future results.