Bitcoin with increasingly negative financial data / matejmo

This article appears in the November 2022 issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.

Ever since bitcoin entered the mainstream, we’ve been warned not to stifle progress by making demands on cryptoasset issuers or intermediaries. Basic disclosure requirements, sound custody arrangements and conduct rules to guard against investor abuse were all treated as relics of an era when trust was required for the financial industry to function.

The crypto sector was to be “trustless,” meaning that counterparties needn’t rely on the integrity of anyone else for transactions to be completed. The blockchain would take care of it all. And imposing rules would only get in the way of the innovation crypto evangelists promised.

Fast-forward to today and it’s not clear what crypto has delivered other than dashed hopes for investors and an effective vehicle for abuse. The fledgling sector is sucking up a disproportionate share of investors’ attention and regulators’ resources. So where’s the innovation? According to new research from the Ontario Securities Commission’s (OSC) Investor Office, almost two-fifths of investors who bought crypto through a trading platform have experienced issues of some sort — from being unable to access their investment to losing their holdings to being hacked and having their identity stolen. And that’s on top of the trading losses many have experienced from dealing in a volatile, speculative market.

To make matters worse, much crypto activity is taking place on credit.

According to the survey, about one-quarter of crypto investors used credit cards to fund trades, while 27% borrowed money (from friends and family, using a loan or a line of credit or from a crypto firm).

The crypto fad isn’t just hurting greedy investors; it has consequences for the real economy too. OSC CEO Grant Vingoe noted in a recent speech that the “outsized focus” on crypto is diverting risk capital from businesses that make stuff and employ people.

Meanwhile, regulators have their hands full. The vast majority of crypto firms haven’t secured registration or exemptions. Those seeking registration require time-consuming bespoke relief, and those that don’t use up enforcement resources as the regulator grapples with investor complaints and chases down unregistered platforms.

The promised trade-off for this trouble was supposed to be innovation: faster, cheaper transactions and improved financial inclusion. So far, however, crypto’s only achievement has been its regulatory arbitrage.