Criticals compare cryptocurrency markets to the Wild West. A key player now wants to have sheriffs come to their town.
Binance, the world’s largest exchange for trading Bitcoin and other cryptocurrencies, says it’s time for global regulators to establish rules for crypto markets. It released a list of “10 fundamental rights for crypto users” this week that it wants to guide discussions with regulators, policymakers and other exchanges.
It acknowledges the obligation of crypto platforms to safeguard users, to put in place processes to prevent financial crime and work together with policymakers and regulators to establish standards for user safety.
For an industry that has enjoyed a surge in popularity partly because of its ability to work outside the control of government and other authorities, it might be strange to call for regulation. But Binance CEO Changpeng Zhao, who goes by “CZ,” says more regulation for the industry is inevitable, and this allows his company to play a role in the discussions. This could also attract people still skeptical about crypto.
“This year, most of the regulators around the world are looking at crypto intently, and many of them are communicating with us,” Zhao said. “So we feel this is the right time” to issue a call for a global framework.
“We feel that it is important for industry players to have a seat at the table,” he said. “And we also feel that some regulations, if they’re made in a vacuum, may not have practical considerations in how they are applied, and they don’t get applied very well.”
Regulatory scrutiny of cryptocurrencies has intensified as they’ve grown more mainstream. Although critics may not be able to grasp the true value of the digital currency created by non-governmental entities, large businesses, professionals investors, and the El Salvador government are all investing in cryptocurrencies. They’re broadening crypto’s base beyond its initial core of fanatics and sent Bitcoin last week to a record high of nearly $68,991, more than doubling in 2021.
Binance’s call for regulation reminds some on Wall Street of the playbook that companies have followed in other disruptive industries after becoming big winners.
“They’re doing what Uber and Lyft did,” said Gil Luria, technology strategist at D.A. Davidson. “Build a business ahead of regulations. When it gets to a certain scale, acknowledge that regulation will be helpful and then help shape it.”
Zhao said that Binance welcomes regulations “for many reasons. A selfish reason is one of the minor ones: in a regulated sector, only a few large players will be left. The smaller players do get cut off, which is unfortunate for those guys.”
The move could also prove to be wise if Binance’s U.S. business ultimately tries to sell stock on a U.S. exchange, something Zhao hopes will happen in the next few years. Coinbase, a rival, already has a near $74 billion market valuation on Wall Street after its initial public offer this spring.
This wealth opportunity has attracted more crypto investors than regulators.
“Right now, we just don’t have enough investor protection in crypto,” Gary Gensler, chair of the Securities and Exchange Commission, said in a speech this summer while calling it the “Wild West.”
“This asset class is rife with fraud, scams, and abuse in certain applications,” he said. “There’s a great deal of hype and spin about how crypto assets work. In many cases, investors aren’t able to get rigorous, balanced, and complete information.”
Analysts believe Binance will be open to reporting transactions to U.S. regulators, who are looking for terrorist financing movements. One of Binance’s “fundamental rights” also calls for strict regulations on marketplaces that offer “derivatives and leveraged instruments,” which can be lucrative but also very risky trades for investors.
Most regulators around the world are focusing on “know your customer” rules, where financial companies try to verify the identity of who’s using their services, Zhao said. They’re also keyed in on protections for consumers.
But even there, “different countries do have different interpretations and different meanings for these very simple words,” Zhao said. For example, in the United States, anti-money laundering focuses on blocking terrorist financing, while Chinese regulators focus more on people who move money outside of their country.
Campbell Harvey, a finance professor at Duke University who recently wrote a book titled “DeFi and the Future of Finance,” said regulators are playing catch-up with complicated and fast-moving technologies, while trying to find a balance between protecting investors and not squashing innovation or driving it to other countries.
To get it right, the stakes are increasing. Big institutional investors such as pension funds are being kept out of crypto by uncertainty over the future regulation. And that’s where the opportunity for even bigger money for the industry lies.
Harvey suggested that the U.S. government could create an agency to supervise cryptocurrencies and their ecosystem, instead of relying upon a mix of regulators.
“It’s complex, and it just doesn’t fit many of the usual regulatory models,” he said.
Zhao said that he only owns Bitcoin and Binance coins. He said parts of cryptocurrency look more like securities while other areas look like currencies or commodities. As people are able to create tokens in a matter of seconds, the ecosystem continues to grow.
This was analogous to when the internet first appeared, and people tried to decide what media to use. It is radio? TV? Some other thing?
“People may have a tendency to view crypto as a single asset, which I think is a little bit misleading,” he said. “Crypto is a fundamental technology that can improve on many of the traditional asset types.”