Coinbase basically played by the rules, wanted to work with the SEC, takes public audits and a 1:1 ratio between liabilities and reserves in US dollars (not their own funny money tokens). And yet they were surpassed in # of users by growth hacking crypto gamesmen like SBF who wanted to drum up the largest possible liquidity pool to use however they pleased with no oversight or regulation.
Animats|3 years ago
What Coinbase wanted:
"Our financial regulatory system is predicated on the ongoing existence of a series of separate financial market intermediaries — exchanges, transfer agents, clearing houses, custodians, and traditional brokers — because it never contemplated that distributed ledger and blockchain technology could exist. A new framework for how we regulate digital assets will ensure that innovation can occur in ways that are not hampered by the difficulty of transitioning from our legacy market structure."
That's exactly how FTX got into trouble. They were an exchange, a transfer agent, a clearing house, and a broker. Also a market maker and a trader. No separation of functions or funds. Blockchain didn't help.
"Responsibility over digital assets markets should be assigned to a single federal regulator. Its authority would include a new registration process established for marketplaces for digital assets (MDAs) and appropriate disclosures to inform purchasers of digital assets. Additionally, in the tradition of other markets, a dedicated self-regulatory organization (SRO) should be established to strengthen the oversight regime and provide more granular oversight of MDAs. Together, they should formulate new rules that permit the full range of digital asset services within a single entity: digital asset trading, transfer, custody, clearing, settlement, money payment, staking, borrowing and lending, and related incidental services."
Again, note the "full range of digital asset services within a single entity". And again, that's the problem, not the solution. That's close to a traditional "bucket shop", a fake broker that pretends to do trades but really just makes entries on its own books. They wanted a "new registration process" with "appropriate disclosures". That means a "litepaper" instead of an S-1 filing under penalty of perjury. And a "self-regulatory organization". Also, although they don't say it here, they wanted regulation by the Commodity Futures Trading Commission, not the Securities and Exchange Commission. The CFTC only regulates what are basically derivatives. The underlying assets are something real, or at least semi-real like ETFs. So the CFTC isn't set up to evaluate initial public offerings.
There's more, but you get the idea. They wanted to go on with what they're doing without having to disclose much, be audited much, or be responsible for much.
It's now clear that regulation of crypto requires the two basic SEC functions - disclosures from issuers, and separation of functions and outside audits of those who handle other people's money. Lack of the first one is why crypto has "rug pulls", and lack of the second is why it has exchange collapses.
[1] https://assets.ctfassets.net/c5bd0wqjc7v0/7FhSemtQvq4P4yS7sJ...