Crypto asset companies face a stark choice: learn to live with regulators or endure their wrath.
One of the main draws for hardcore advocates of digital assets is that many theoretically sit outside the reach of government and monetary authorities that oversee activities in conventional markets.
While the dream of a decentralised financial system is still alive and well in the crypto community, what has actually developed is an industry full of very large financial companies.
Big Crypto includes exchanges like Coinbase and Binance as well as issuers of stablecoins, digital tokens backed by or linked to other assets, such as Tether and USD Coin backer Circle.
The exchanges process hundreds of billions of dollars combined each month, and the market value of just the two largest stablecoins has reached around $90bn.
This activity is increasingly spilling into the tightly regulated traditional financial system. Many exchanges allow withdrawals and deposits from bank accounts and through major payments cards. Tether and USD Coin are backed by reserves that include short-term debt issued by traditional companies, their issuers say. That means they could become systemically significant outside of the crypto market, something that has prompted concern at the Federal Reserve and ratings group Fitch.
Crypto firms are also racing to public equity markets. US-based Coinbase listed on Wall Street this year, while Circle is planning to debut in New York through a deal with a listed investment vehicle. High-profile financial companies and hedge funds are also looking to get into the game.
The industry’s blockbuster growth and big ambitions have been fed, at least in part, by its ability to operate with a “move fast and break things” mentality. When crypto was still in its earlier stages, regulators were able to mostly shrug this off as a sideshow.
But financial watchdogs are now grappling with serious questions: how can they ensure crypto is not being used for money laundering or the financing of terrorism? How do they protect consumers from scams or other schemes? At what point does Big Crypto begin causing a systemic risk to traditional asset markets?
This surge of supervisory interest poses a serious risk to some players, but also presents an opportunity for others. It has caused something of a split in the crypto industry. Some operators are slowly winning over officials by professing their compliance bona fides or by explaining their business models in extensive detail. Others are playing catch-up.
“We’re exactly in the eye of the storm,” said Ian Taylor, executive director of CryptoUK, a trade body that represents the industry. He said many “early adopters” have to shift from a mindset of crypto “being outside of centralised control” to being large, mainstream operators.
This process will ultimately be a boon to the sector’s prospects. Many crypto industry participants fret that a few bad actors will ruin it for everyone. A serious blow-up could destroy the progress made by proponents who have worked for years to sell consumers, investors and regulators on their vision for the future of finance.
Crypto companies that submit themselves to more rigorous scrutiny should also have an easier time operating within the bounds of traditional finance.
Some companies are making progress in this area. Hong Kong-based exchange Crypto.com last week, for example, said it became the first global crypto company to obtain an electronic money institution license in Malta, allowing it to issue payment cards and offer bank transfers directly to consumers.
In the UK, Gemini, a crypto company founded by the Winklevoss twins, is among the few operators to have been approved by the Financial Conduct Authority to become a registered cryptoasset company.
The flipside is that regulators are taking a stronger line in their scrutiny.
Tether and exchange Bitfinex, for example, agreed in February to pay an $18.5m penalty after New York’s attorney-general said they had “recklessly and unlawfully covered up massive financial losses”. Neither firm admitted wrongdoing. The FCA last month also issued a consumer warning against Binance, one of Big Crypto’s most significant players which has faced concerns over its compliance practices.
Regulators are now closing in on the industry. Big Crypto groups that enjoy market leadership will face heavier demands on compliance, transparency and consumer protection.
Adam Samson can be reached at adam.samson@ft.com or on Telegram @adamsamsonFT.
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