By Fabio Pezzotti, CEO and Founder of Iconium
U.S. President George W. Bush’s 2008 bailout of the major players in the auto and banking industries sent a clear message: Even under an otherwise laissez-faire Republican administration, these industries were too essential to the economy and national interest for the government to stand by and watch them go under. Of course, by providing billions in federal aid to car makers and major U.S. banks, the government was bartering aid for regulatory control.
Following the loss of over $2 trillion in crypto funds since November and rather sudden transition into a bear market, talk surrounding regulatory control has heated up again. Similar to the Bush administration back in 2008, governments globally are realizing they can no longer afford to sit on their hands. But is the aforementioned bailout model a viable choice for crypto?
No longer a techie niche
The crypto industry’s expansion over the last few years has been nothing short of meteoric. This can be represented by the explosion in Bitcoin’s value, which stood at just $3,468.25 on February 1, 2019. Despite falling from an all-time high of over $69,000 in November 2021 to fluctuating around $20,000 of late, Bitcoin’s rise over the years is undeniable and has majorly driven the wider crypto and blockchain industry into the mainstream.
Three-hundred million people in the world own crypto. It’s safe to assume this figure will rise much higher by the end of the year, especially considering the dip in the market will likely attract new investors ready to seize the opportunity to enter the crypto game in anticipation for the next bull run. In fact, according to a report from Crypto.com, since global crypto ownership nearly tripled during 2021, it's a real possibility that the number will reach 1 billion by the end of 2022.
Regardless of where this is no longer a retail investor’s game. Silicon Valley VCs and, more recently, several leading international investment banks like Barclays and Goldman Sachs have entered the game.
Data on crypto adoption speaks loud and clear. And if it’s true that the recent collapse of LUNA, based on calls for regulation, teaches us that the “too big to fail” paradigm is dead, then what is certain is that this market has simply become “too big to ignore.”
Imagining crypto regulations
While the last crypto bear run was brought on by the boom of initial coin offerings (ICOs) and scams that often duped retail investors, the current one seems to have been triggered by adverse macroeconomic conditions, with the recent being further exacerbated by institutional investors overusing leverage. Following the drop in prices, in fact, these big players pose the risk of a cascade of forced sales potentially driving the tokens even lower. And ironically enough, now that institutional investors have entered the crypto game, the industry is starting to look a lot like traditional financial markets—although less regulated.
In the recent crash we are going through, the topic of bailouts has become increasingly hot. A few days ago Alameda Research has issued a loan of $200 million USDC and a revolving line of credit of BTC 15,000 to the crypto brokerage firm Voyager Digital and FTX has offered a $250 million loan facility to BlockFi, with the CEO of the two companies announcing they are ready to step in to prevent an industry contagion.
On the other side, U.S. SEC Commissioner Hester Peirce criticized crypto bailouts, arguing that the current market situation could set the foundation for a more sustainable future for the industry.
But talking about bailouts, is there really a one-size-fits-all answer?
The help provided to a project should not be based on the size of its user base, but rather on its potential. Forcefully perpetuating projects with unsustainable models and little utility only to protect investors is not the answer. Instead, we should focus on supporting projects that have long term survival, promising potential, and a sustainable business model.
At the same time, more and more governments are striving to accelerate the process of framing the industry from a regulatory perspective. Earlier this month U.S. Sens. Cynthia Lummis (R) and Kirsten Gillibrand (D) introduced a major piece of legislation that would establish a regulatory framework for digital assets. The bill, titled the Responsible Financial and Innovation Act, aims to foster responsible innovation while dividing the regulation of digital assets between the U.S. Securities and Exchange Commission and the Commodities Futures Trading Commission.
This proposed legislation seeks to establish a wide range of standards and procedures surrounding digital assets, which includes providing consumer protections. In a sense, by making providers of digital assets disclose key product information, such a bill could also help prevent economic fallouts.
Despite some crypto enthusiasts still holding onto their contempt for regulation in a space defined by decentralization, regulation is the only real way to achieve mass adoption.
In short, finding a baseline regulation has become a key issue. Ideally, the optimal regulation would be one that can control without undermining decentralization—one that can frame cases without stifling innovation. This is of course a major challenge to overcome, but the recent market crash may turn into a learning opportunity for both regulators and market participants, stimulating dialogue between governments and major players. This would surely represent a good starting point.
Today’s financial markets follow the ups and downs of Google, Facebook, and Netflix, but in the near future they may also ebb and flow with the likes of Bitcoin, Ethereum, and other projects that may yet to have been born. With mass adoption around the corner and more and more institutional players involved, the need for effective regulation can no longer be postponed.
About the author:
Fabio Pezzotti, a tech entrepreneur since 1998, graduated from Bocconi University in Milan, Italy. After several business development and strategic consulting roles in Paris, London, and Milan, he founded his first Internet venture, Xoom Spa, in 1999, which became the leading web community in Italy. In 2006, Pezzotti founded Mobango LTD. in London, a unique mobile-user content platform, one of the first Android app stores. In 2010, he founded Xandas New Media Ventures, a venture studio investing in seed startups. In 2017, Pezzotti discovered Bitcoin and blockchain, deciding to fully devote himself to researching and selecting the best crypto projects in the world, founding, together with an experienced and international team, Iconium.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.