For the last decade, crypto businesses have mainly operated outside of the reach of global regulators. That is about to change.
For the last decade, crypto businesses have operated outside global regulators’ reach. Entrepreneurs have created vast fortunes by offering financial products not constrained by financial regulations. All of that is about to change.
This week the SEC announced plans to sue the USA’s largest crypto exchange, Coinbase relating to an offering that gives investors interest. The SEC says Coinbase is not regulated to offer such a product as they consider it a security.
SEC urges crypto exchanges to operate according to securities law.
This move by the SEC should be seen as a significant warning sign that they intend to go head to head with crypto-related businesses. It signals a turning point in the world of Crypto. No longer is crypto-currency lending a fringe asset class operating in the wild wild west of the internet; the time has come for the sheriff to lay down the law.
In the coming year, financial regulators worldwide will likely turn their sights to Crypto businesses and require them to comply with technical regulations that are still being drafted and traditional securities laws. The only exception will be those companies that are already regulated to sell securities or are regulated banks and will have the benefit of continuing trade and will likely have a poll position for any changes in the requirements.
Most of the major companies in Crypto have been regulated as money service businesses. Still, if crypto and crypto lending is classified as a security, they have to sell their products very differently and change how they deal with their customers. On top of that, new regulations are being drafted for any financial institution offering crypto services that are only being offered to those that are registered securities businesses already.
It’s an ironic situation where the regulators are now disrupting the businesses that have disrupted financial markets in those markets.
Crypto businesses that do not have regulatory approval to offer securities will be forced to form an orderly lineup that could take a year or more to get approval. The process could set back the plans and ambitions of some of the bigger businesses by years and give way to smaller firms that are ready to offer Crypto investing and lending products sold as securities to overtake those constrained by red tape. When it comes to the SEC and other regulators, you can’t rush them or bully them.
PayPal has announced its intentions to move into the cryptocurrency space with an offering that will launch later this year. It is no longer the disruptive startup it once was, but its advantage today is its long history of dealing with regulators, which could give it an edge.
To my knowledge, only one company in the world has regulatory approval as both a virtual asset service provider and a registered securities business, which has been operating in compliance with securities laws for over a decade. A relatively small investment platform called “Back to the Future,” which has only 150,000 registered investors (mostly higher net worth investors), is the only crypto-focused company that has been offering crypto buying, lending, and crypto equity investing services sold in compliance with both securities laws and new virtual asset service provider registrations.
Back To The Future was the original platform that helped raise money for giants like Kraken, Coinbase, BitFinex, BitStamp, Circle, and Blockchain.com. Despite being a relatively small business, It’s now in a unique position because of its consistent ability to stay on the right side of regulation.
In the 2000 Summer Olympic Games, Eric Moussambani Malonga, a swimmer from Equatorial Guinea who had never even seen an Olympic-sized pool, won his heat after all other swimmers were disqualified due to false starts. His victory is a reminder that the rule makers can sometimes disqualify strong players on a technicality and make room for unlikely winners.
Coinbase and other large crypto-lending companies like BlockFi and Celsius have a strong position now. Still, the future of the Crypto business will likely have more to do with regulatory approval than white papers, branding, and well-designed smartphone apps.
The disruptors are facing severe disruption as the whole industry finds itself on the radar of global regulators who have been given the go-ahead to start cleaning things up.
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