[Animats]

The crypto exchange world is coming apart. FTX, BlockFi, maybe Crypto.com. Institutional investors are getting out.

If either Binance or Tether goes down, it's all over. Both are opaque and probably have less reserves then they claim. As withdrawals continue, we'll find out who really has assets.

People who like to read financial statements are awaiting the filings in the FTX bankruptcy. For the first time, all those related companies have to file public financial statements under penalty of perjury. Expect a lot of "They did what with that money?!"

What may well happen now is that US crypto exchanges, and those that deal with US persons, will be required to become brokers, dealers, or "national securities exchanges" under the Securities Act of 1934, like real stock exchanges.[1] The SEC can now do this, because, last week they finally won the first big lawsuit on whether crypto is a security.[2] Now they can tell all crypto issuers to register and file an S-1 under penalty of perjury, and tell all exchanges to register as brokers, dealers, or exchanges. The crypto community will scream and demand Congress exempt them. No one in Washington will listen any more. Do regulated US exchanges go bust and lose billions of customer funds? No. Any questions?

Crypto companies wanted special regulations for crypto, but it's too late for that. They'll probably have to become broker-dealers. Series 7 exams. Registered representatives. FINRA regulation. SIPC insurance. Audits. Compliance departments.

(I've had a US broker go bust when they were holding stock of mine. I got it out in about a week, after making a lot of phone calls.)

It's not the end of the crypto world. Gemini will probably become a regulated exchange. Maybe Coinbase.

[1] https://www.law.cornell.edu/uscode/text/15/chapter-2B

[2] https://www.natlawreview.com/article/sec-v-lbry-inc-sec-s-la...

[capkutay]

Coinbase basically played by the rules, wanted to work with the SEC, takes public audits and a 1:1 ratio between liabilities and reserves in US dollars (not their own funny money tokens). And yet they were surpassed in # of users by growth hacking crypto gamesmen like SBF who wanted to drum up the largest possible liquidity pool to use however they pleased with no oversight or regulation.

[Animats]

Not quite. They wanted a new set of rules, ones they wrote, just for crypto. Here they are: [1]

What Coinbase wanted:

"Our financial regulatory system is predicated on the ongoing existence of a series of separate financial market intermediaries — exchanges, transfer agents, clearing houses, custodians, and traditional brokers — because it never contemplated that distributed ledger and blockchain technology could exist. A new framework for how we regulate digital assets will ensure that innovation can occur in ways that are not hampered by the difficulty of transitioning from our legacy market structure."

That's exactly how FTX got into trouble. They were an exchange, a transfer agent, a clearing house, and a broker. Also a market maker and a trader. No separation of functions or funds. Blockchain didn't help.

"Responsibility over digital assets markets should be assigned to a single federal regulator. Its authority would include a new registration process established for marketplaces for digital assets (MDAs) and appropriate disclosures to inform purchasers of digital assets. Additionally, in the tradition of other markets, a dedicated self-regulatory organization (SRO) should be established to strengthen the oversight regime and provide more granular oversight of MDAs. Together, they should formulate new rules that permit the full range of digital asset services within a single entity: digital asset trading, transfer, custody, clearing, settlement, money payment, staking, borrowing and lending, and related incidental services."

Again, note the "full range of digital asset services within a single entity". And again, that's the problem, not the solution. That's close to a traditional "bucket shop", a fake broker that pretends to do trades but really just makes entries on its own books. They wanted a "new registration process" with "appropriate disclosures". That means a "litepaper" instead of an S-1 filing under penalty of perjury. And a "self-regulatory organization". Also, although they don't say it here, they wanted regulation by the Commodity Futures Trading Commission, not the Securities and Exchange Commission. The CFTC only regulates what are basically derivatives. The underlying assets are something real, or at least semi-real like ETFs. So the CFTC isn't set up to evaluate initial public offerings.

There's more, but you get the idea. They wanted to go on with what they're doing without having to disclose much, be audited much, or be responsible for much.

It's now clear that regulation of crypto requires the two basic SEC functions - disclosures from issuers, and separation of functions and outside audits of those who handle other people's money. Lack of the first one is why crypto has "rug pulls", and lack of the second is why it has exchange collapses.

[1] https://assets.ctfassets.net/c5bd0wqjc7v0/7FhSemtQvq4P4yS7sJ...