Crypto is in trouble. After an overheated year of billion-dollar valuations, top-notch celebrity endorsements, and a Super Bowl teeming with cryptic cryptic ads, companies are struggling.
FTX, the former second largest cryptocurrency exchange, crashed spectacularly in November. Major exchange Coinbase announced on Tuesday that it is laying off about 20% of its staff; On Thursday, the Securities and Exchange Commission charged Genesis Global Capital and Gemini Trust, a cryptocurrency lender and exchange, respectively, with offering unregistered securities. “Cryptocurrency winter” continues as investors withdraw coins in record numbers. Crypto’s heyday of unregulated activities largely fueled by expansive venture capital and scammers appears to be on the wane.
But no one should be too quick to proclaim the end of cryptocurrencies. Like another set of fast-growing internet businesses that grew earlier — online gambling and betting platforms — cryptography will likely continue to spread, even along the murky fringes of the economy. And unless consumers, politicians and prosecutors remain vigilant, the cryptocurrency industry will continue to produce wealth for the few at the expense of the most vulnerable.
In gambling, the house always wins. But in cryptocurrencies, the house not only holds all the cards, it creates them – into the tokens and digital coins that form its currency – through an opaque process with little oversight.
The industry’s tone to the public has been to cut out the middlemen of traditional banks by allowing consumers to trade through decentralized online exchanges. Instead, these exchanges and other crypto platforms operate as a new class of intermediaries focused on their profits, not on ensuring the secure transfer of assets.
Take cryptocurrency golden boy Sam Bankman-Fried, who is now on trial, accused of building a house of cards on FTX reminiscent of Bernie Madoff’s multi-billion dollar scam in which seemingly safe yields vanished into thin air. The former head of Alameda Research, Bankman-Fried’s trading firm, testified that Bankman-Fried committed fraud. He came close to admitting it himself, acknowledging to a reporter last spring that the cryptocurrency industry was indeed a Ponzi scheme. That scheme briefly made Bankman-Fried the 41st richest person in the world, before leaving billions to investors.
FTX is hardly the only cryptocurrency firm treating customer deposits like a piggy bank. The cryptocurrency playing field is littered with devastating losses for retail investors from fraud, scams, and racketeering big and small around the globe. Some companies are getting help from the courts: Celsius is heavily in debt, but since a bankruptcy court ruled that it owns most of the bitcoins deposited on its platform under its user’s terms and conditions, investors likely won’t get back all of theirs. money .
Despite the continued exposure of fraud and misconduct, some continue to believe in the fantasy that cryptocurrencies inherently exist beyond government oversight. But in reality, most cryptocurrency companies meet the legal definition of “money services firms”. Such companies have strict compliance obligations to track the money traded on their platforms and to know who is exchanging that money. When there’s reason to be suspicious, these companies must file documents, known as suspicious activity reports, to alert federal authorities of questionable transactions. Many cryptocurrency companies have simply failed to meet their obligation to register as a money services company, nor have they met their compliance obligations.
Regulators are putting out fires where they can. Coinbase recently agreed to a $100 million settlement with the New York Anti-Money Laundering Regulator. The crypto arm of Robinhood has also been fined $30 million by the state of New York for allegedly violating money laundering regulations in recent months. Cryptocurrency exchange Bittrex faced a nearly identical fine from the Federal Financial Crimes Enforcement Network (FinCEN) for similar conduct. BlockFi had to pay the SEC and state regulators $100 million for not registering its lending product.
Increased enforcement by state agencies, the SEC, and FinCEN could undermine current strategies to leverage cryptocurrency exchanges. The SEC’s robust reporting program and a recently expanded reporting program specifically for money laundering and sanctions evasion should also help regulators manage risk as insiders continue to come forward with information about the fraud cryptography.
But as with any law that depends on compliance, enforcement will mean a continual game of whack and whack in a playing field too crowded for regulators and prosecutors to stop all the bad actors. Online gambling offers a warning about these challenges.
When the Supreme Court ended the federal ban on state licensing of sports betting in 2018, it paved the way for a legal gambling industry of tightly regulated websites and casinos. But by the time the government intervened, a far-reaching illegal industry had already grown alongside online gambling, making money launderers billionaires. And legalized gambling hasn’t stopped Americans from illegally gambling an estimated $511 billion a year, far exceeding the more than $125 billion legally wagered in the years since the regulation. Clearly, these shadow industries are virtually impossible to eliminate.
Anyone concerned about the potential risks of cryptocurrencies to society and the economy – and at this point, that should include most people – shouldn’t look away now. The industry is likely to be here to stay, in one form or another, by finding loopholes, creating shady new industries and escaping regulation, just as much of the online gambling industry continues to do.
But this moment of “crypto winter” creates opportunities to push the excesses of the sector on a less destructive path. The government must continue working to remove scammers from the market and clarify that cryptocurrencies are not above the law.
Consumers, meanwhile, should refuse to support exploitative initiatives. Only through these two paths can we put down the ongoing fires sparked by the cryptocurrency industry that have stolen savings and hopes from people across the country, and most critically, prevent new fires from igniting.
Poppy Alexander is an attorney who represents whistleblowers who report corporate fraud. Rebecca Ackermann is a writer and designer who has worked at Google and NerdWallet, among other tech companies.