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Regulators are facing something that they have never really faced before: globalization.
The collapse of the crypto exchange FTX (FTT-USD), which filed bankruptcy in the U.S. on Friday, has set the scene.
The regulators cannot back off now. Events are thrusting markets into places of no return.
First, the regulators are dealing with modern information technology. The advancements in this space are enormous and are a challenge to oversee even in their simplest form.
But, the evolution of modern information technology advancements is global in nature and hence is outside of any real geographic oversight.
As Martin Arnold states in the Financial Times (subscription required),
“One of the biggest problems confronting regulators (is) the difficulty in pinning down where many crypto asset providers were based.”
Historically, regulation is set up for specific legal entities and specific geographic territories.
This specificity does not exist for current crypto asset providers.
In the case of FTX, there is a “multi-jurisdictional web of wholly owned subsidiaries and intercompany loans including entities in the Bahamas, Cayman Islands, Antigua and Barbuda, as well as the U.S. Japan, Germany, and Switzerland.”
Modern information technology is global and must be perceived to operate in a global fashion.
Attempts
The European Union “is finishing legislation to bring crypto asset providers under a regulatory framework for the first time, known as Markets in Crypto-Assets, which will replace a patchwork of national rules.”
But, Andrea Enria, chair of the European Central Bank’s supervisory board, said that he was proud that the EU was the first jurisdiction to “bring these entities under some form of supervision.”
However, Mr. Enria predicted that the whole effort “would be an interesting challenge.”
One problem, however, is that some providers are threatening to “route more of its European customers’ trading via its offshore entities if EU regulation tried to force it to provide much more euro-denominated issuance.”
As I mentioned above, this situation is a global one, not just constrained to local geographic boundaries.
The U.S. is trailing further behind the ECB.
The World
But, the problem is not going to go away.
As I have written many times before, the future is digital. This movement cannot be stopped.
The crypto-world is going to expand, and the existing banking world is, somehow, going to have to be integrated with it.
This should not be a “surprise conclusion.”
One of the problems with creating the “new” world that is a regulated world is that there is so much money floating around the world that “players” in the crypto-world have resources available to them to push things to the limit.
I have not backed-off from my claim that the crypto-bubble took advantage of the Federal Reserve efforts to protect the world from a Covid-19 based financial crisis.
Unfortunately, all this liquidity floating around is providing crypto-players to take advantage of opportunities that are available to them. FTX was just one of the players that were able to take advantage of all the money floating around.
But, the situation is getting more serious.
The crypto world must be brought under control.
This, I believe, is going to be quite some battle.
Unfortunately, this battle is going to be taking place at the same time that world central banks are facing very severe inflationary problems.
The world is in a great disequilibrium and these are going to have to be worked out over time.
My concern is that many are going to suffer a lot of pain.
How this pain will be avoided is a real problem.
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