For years, experts, academics, and lawmakers believed cryptocurrency regulation to be imminent. And for years, regulation failed to materialize.
Last year, though, interest in cryptocurrencies among the general public rose, spurring renewed conversations about how to regulate. To protect investors, the Biden administration recently recommended Congress issue legislation around stablecoins, virtual currency tokens pegged to reserve assets like the U.S. dollar. Regulation seems closer now than ever before, but it might still take years for any laws to be ironed out, partly due to the industry’s rapidly-evolving nature.
“Regulators are not certain as to exactly what they want to do, and so they’ve been very slow to move and won’t give any guidance,” said Karl Cole-Frieman, a co-managing partner at law firm Cole-Frieman & Mallon, who represents several cryptocurrency fund managers in the U.S.
This shouldn’t stop crypto entrepreneurs from preparing for what many consider inevitable. While large cryptocurrency companies, such as Coinbase, Ripple, and LedgerX, could have a hand in drafting potential policy alongside lawmakers, startups in the space can factor future compliance costs into their budgets and partner with peers to formulate industry-accepted guidelines.
From its inception, the cryptocurrency community prided itself on being deregulated, anonymous, and publicly auditable. Tides are changing, however, as the surge in crypto adoption has also given rise to an onslaught of scams, leading even crypto enthusiasts to see regulation as a way to protect consumers— especially now as institutional players appear to be showing interest in investing in digital assets.
“I think the liquidity crisis back in March 2020 accelerated and put a spotlight on crypto,” Alpha Kargbo, CEO of Crypcentra said. “This year crypto is at the forefront of a lot of institutions’ minds.”
500 Global portfolio company Crypcentra, which offers institutional investors a suite of tools to help them make sense of the crypto market (kind of like a Bloomberg Terminal for digital assets), has regulation at the forefront of its business model.
Kargbo, who has a background in traditional finance, said Crypcentra has kept “an ear to the ground” on regulation. The company believes any potential policy could have an impact on the types of products it can offer its customers in the future.
“We took a step back and spent a lot of time thinking about how regulation is evolving and making sure we have a regulatory framework already in place first before we start building out these features,” he said.
Crypcentra consults with a U.K.-based law firm with crypto expertise to develop a “multi pronged” approach to potential regulation, international and domestic. “We’ve developed internal principles that are framed on/derived from the best practices of fintech companies at our stage and beyond,” Kargbo said.
One way to get ahead of likely compliance is partnering with larger cryptocurrency companies that already have established relationships with regulating bodies.
“Regulation is always going to be costly from a time, operations and capital perspective,” Ayoola Oluwanusin, Crypcentra’s Tech Lead, said. “As an early-stage company, you don’t want to spend a lot of your capital to handle compliance. You’re better off having, or building, partnerships with the players who are already handling this.”
Another way to prepare is to cultivate market influence, but that entails building a sizable customer base which could get a company a seat at the table to help co-create policy.
Cole-Frieman advises early-stage companies to act as if regulation is already here. This means connecting with other players in the industry to create a baseline of best practices each business can abide by until regulators come knocking — whenever that may be. At times, it seems the government has taken a “wait and see” approach to the industry.
“I think in the United States, there’s a hesitancy to shut down technological innovation,” Cole-Frieman said. “Cryptocurrency is tethered to innovation of blockchain technology, and I don’t think anybody wants to shut down that innovation.”
Right now there is no regulatory body responsible for drafting rules for cryptocurrencies. It’s up to Congress to decide who takes on that task. This worries startups because of the potential of overlapping rules and audits from various governmental bodies. The hope is that one centralized body, like the Securities and Exchange Commission, will be assigned with regulation and classification of digital assets.
Until then, founders like Oluwanusin and Kargbo have to prepare for any and every scenario — which they don’t see as a downside. “Regulation is not always a bad word,” Oluwanusin said. “I think it can be a positive thing for the ecosystem.”