As more people come into cryptocurrency, the more it becomes vulnerable to risks. One of the main reasons is the rising number of newbie users that tend to dive into investing in new platforms. Platforms that will lure people with the earning possibility. The lack of crypto regulations allows more users to invest regardless of their financial standing. Is the lack of regulation of digital assets leading to crypto downfall?
While numerous factors influence cryptocurrency volatility, the main cause of this sudden drop is the failure of FTX, one of the most prominent crypto exchanges.
According to the Wall Street Journal, FTX lent billions of dollars in customer assets to crypto trading firm Alameda Research, which is majority owned by FTX CEO Sam Bankman-Fried. Alameda allegedly used the funds to fund high-risk trades.
It was reported last week that Alameda’s balance sheet was largely made up of FTX tokens. Given that Bankman-Fried owns a majority stake in both Alameda and FTX, it raises serious concerns that Alameda is based on a cryptocurrency created by its sister company. Following the publication of this report, investors began withdrawing funds from FTX.
However, because FTX had lent so much money to Alameda, there needed to be more funds to allow investors to withdraw. As a result, it faced an $8 billion shortfall, according to the Wall Street Journal. Bankman-Fried has resigned, and the exchange has filed for bankruptcy. Can proper regulation prevent these things to happen? Does it play any role in crypto prices?
Crypto regulations role in crypto prices
Crypto regulations provide an important role in crypto prices. “Regulations are a good thing for the industry,” says Adam Reeds, founder, and CEO of Ledn, a crypto-backed lending firm, because “many institutions and larger established groups are sitting on the sidelines.” In fact, he believes that many of these institutions would like to invest in cryptocurrency, but that a lack of regulations makes it impossible.
Furthermore, according to Katherine Dowling, general counsel, and chief compliance officer at Bitwise Asset Management, regulations “should create a framework where there are disclosures.” Dowling goes on to say that these disclosures will help create transparency for the entire investment class.
Transparency is critical for institutional investors, and it cannot be overstated. Because of the risk-management nature of institutions, each investment must have a risk profile. These risk profiles can only be created for transparent assets, which cryptocurrencies are not yet.
For example, in May, the lack of transparency for the algorithmic stablecoin TerraUSD (UST) not only resulted in massive price drops for UST, but also for its sister coin LUNA and BTC prices. A Chicago investor recently filed a securities fraud class-action lawsuit against six crypto venture capital firms that backed Terra tokens in the months leading up to the crash.
This was not the first time a cryptocurrency had caused investors to suffer severe financial losses. Ethereum’s DAO coin failed in 2016 due to a hack, resulting in the theft of $60 million in Ethereum’s Ether (ETH) coin. The underlying blockchain of Ethereum was eventually forked, and the stolen currency was returned, but the experience had far-reaching consequences. Not the least of these changes was the Ethereum community’s adoption of two blockchains: Ethereum and Ethereum Classic.
Tether’s USDT coin has recently caused problems for the stablecoin due to a lack of transparency. In fact, the Commodity Futures Trading Commission fined USDT’s issuer $42 million after the company was found to be in violation of the Commodity Exchange Act and other CFTC regulations. This was in addition to the $18.5 million settlement payment made to the New York Attorney General’s office in February 2021. The majority of the settlements and fines were related to audit issues for USDT’s existing treasury. This is an example of a problem that could be addressed with increased crypto regulation.
Experts believe that until there are regulations governing the reporting and trading of cryptocurrency assets, none of these price drops will be the last. This level of uncertainty is unsustainable for a large financial institution. Financial firms may avoid speculating on assets that could lose massive amounts of capital due to underlying fiscal problems due to their massive balance sheets.
However, with the help of regulations and resulting transparency, large institutional investors could not only stomach greater investments in crypto, but those investments could also help stabilize asset prices overall, according to Vin Narayanan, chief strategy officer at KingsCrowd. Indeed, Reeds adds, his firm’s retail and high-net-worth clients simply want clarity about their investments. This level of clarity will not be possible for cryptocurrencies until regulations are in place.
Due to the lack of regulations in the crypto industry, everyone must ensure that we are ready to face whatever consequences the market might face. We must also ensure that we only invest the amount we can afford to lose and also properly research the platforms we will be investing in. As an advocate of safe and secure blockchain technology, PrivacySwap aims to create a platform that embodies fund security, convenience, and income possibility in one platform. We also welcome crypto regulations that will provide an extra layer of security to the cryptocurrency market without sacrificing the income of every user.
We understand that the world changes quickly and our only option is to adapt. In that regard, we are working on something that will provide you with more income possibilities and extra security that will make your crypto transaction better than ever. Stay tuned with us to find out more!