The Crypto Crackdown Is Just Getting Started


There was much joy online when the US Department of Justice announced the arrest of the founder of crypto exchange Bitzlato last week. Unpronounceable, unfamiliar, and unlike any of the much bigger fish (like Binance) making headlines, Bitzlato looked like a little fried, a burger with nothing on it. The fact that Bitcoin resumed its march beyond $21,000 seemed to confirm this.

But this ignores the big picture. In the first weeks of 2023, the control bodies have done a lot. On Jan. 3, a joint statement from US banking regulators warned the industry of crypto risks infiltrating the banking system. Then came a $100 million settlement with Coinbase Global Inc. for weak internal controls, a lawsuit against Gemini and the Winklevoss twins’ broker Genesis for allegedly selling unregistered securities, and a $45 million settlement with lending platform Nexo. (which has ceased operations in the US). The subpoenas are flying.

The wheels of justice turn slowly: The Gemini and Genesis complaint came too late for clients fighting to recover $900 million in trapped funds, but now they are speeding up. Regulators like the SEC feel justly vindicated by the events of the past year, in which a widespread loss of faith in cryptocurrencies failed to escalate into a broader economic crisis. The FTX collapse demonstrated the failings of the industry, but also the benefits of a strict regulatory line on exchanges, such as when the SEC intervened behind the scenes in 2021 to prevent Coinbase from launching its own crypto-lending product. As one official said last year, “the track is getting shorter” for the rebel rigs.

There may be a lot of debate as to whether crypto tokens are more like securities, commodities, shadow banking, or gambling, but the current focus is on ensuring cryptocurrency woes don’t seep into the financial system. While legislative attempts to craft crypto rules designed to prevent another “Lehman Brothers moment” are met with procedural delays and embarrassing revelations about FTX’s history of cozy ties to Capitol Hill, regulators with long memories are keeping an active eye on Banks’ Crypto Exposure as the True Indicator of Risk Silvergate Capital Corp., already crushed by its FTX exposure, appears to have gotten the message and noted the value of the stablecoin assets it bought from Meta Platforms Inc.’s Diem, worth nearly $200 million at the time, basically down to nothing.

Bitzlato’s action is part of this push, with the Justice Department citing the exchange’s inadequate anti-money laundering controls and “substantial” business with US clients, two examples of the type of regulatory gaps in the system that went undetected by the authorities. red flags of FTX. Carol Van Cleef, a lawyer with long experience in digital assets, sees a blueprint for future action, including the US Treasury’s determination that Bitzlato is a “major money laundering concern,” effectively making it a pariah. international. This goes beyond the SEC.

Regulation has critics. Some fear going too far; others think it is counterproductive to try to build guardrails around digital assets rather than step back and let it burn out. It is true that cryptocurrencies are riddled with activities that are more gambling than investing. And it’s kind of depressing to see that those at the center of last year’s crypto crash already have redemption on their minds, from Three Arrows Capital to FTX.

But money laundering, fraud, market manipulation and tax evasion are not self-fixing risks. As Fabio Panetta of the European Central Bank has pointed out, regulators see the costs to society of unregulated digital assets as high and require further action. The crackdown is clearly just beginning; Those eager to dive back into crypto, even after taking a shower, should take note.

More from Bloomberg’s opinion:

• Crypto’s Hotel California Traps Winklevoss Twins: Lionel Laurent

• The Matt Levine Money Affair: Crypto Banks Owe Themselves Money

• Gold is getting its shine back: Merryn Somerset Webb

This column does not necessarily reflect the opinion of the editorial board or of Bloomberg LP and its owners.

Lionel Laurent is a columnist for Bloomberg Opinion covering digital currencies, the European Union and France. Previously, he was a reporter for Reuters and Forbes.

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