Cryptocurrency firms must make information about their market simpler for investors, and a "collective effort" is needed to "educate regulators" to act as effective watchdogs of the sector, a vice president at cryptocurrency exchange Binance has told UK MPs.
Daniel Trinder, vice president of government affairs at Binance, the world's biggest crypto trading venue, made the statement to the UK Government's Treasury Committee yesterday (14 November), as part of a panel of crypto industry representatives grilled by MPs on the safety of the market.
Crypto, Trinder said, is "complex for those not really in the detail of how these markets operate, which is common to some of the traditional markets, like fixed income, for example - but that needs to change".
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The crypto market structure must, he added, "become simplified, [with] information more accessible to investors, and become much more transparent".
While Trinder was referring to investor understanding, he made a similar case for regulators in terms of effective governance.
He told MPs on the committee: "There needs to be much more of a collective effort by the [crypto] industry to educate the regulators on some very technical issues, not just auditing but security and wallets. That must go on."
This is necessary, he said, "because the supervisors in many cases need those sort of industry insights so they can fulfil their obligations."
Much of cryptoasset regulation sits outside the Financial Conduct Authority's current remit, though since January 2020, firms carrying on cryptoasset activity in the UK have had to comply with the Money Laundering, Terrorist Financing and Transfer of Funds Regulations, and be registered with the FCA to do business. Not being registered is a criminal offence.
UK financial services regulators could be poised to take on a bigger role in the crypto world, however.
In April, then Chancellor Rishi Sunak, now prime minister, declared he wanted to "make the UK a global hub for cryptoasset technology", part of his plan to "ensure the UK financial services industry is always at the forefront of technology and innovation".
Since then, the cryptocurrency sector has been rocked by scandals, including the implosion in price of supposedly stable coin LUNA Terra from $80 a token to $1 wiping $40bn off its value, to the collapse and bankruptcy of crypto exchange FTX, once valued at $26bn.
FTX's bankruptcy has forced other digital asset exchanges, including Binance, to reassure clients their funds are safe.
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In today's hearing crypto firm representatives admitted mistakes in the sector, but also blamed macro events such as rising interest rates for part of the fall in the value of cryptocurrencies, forcing them to admit they do not, as some others have suggested, act as a hedge against inflation.
While in Europe the overarching regulation of the cryptocurrency market is done by the Markets in Cryptocurrency Assets (MICA) rules, Ian Taylor, executive director at CryptoUK, the self-regulatory trade association for the UK cryptoasset industry, told MPs in the UK the approach is "piecemeal".
He added: "We have been advocating for the last four years for the UK to get a more joined up, collaborative approach within government."
Taylor called for the appointment of a crypto "tsar that can move across different departments and understand the complete nature of some of the tech, to bring together all of the departments regulating this sector".
"We need regulation," he told MPs. "If there had been regulation we may not have seen the recent failures".
He also warned cryptocurrency is a "highly risky asset class" and that "we always advise people to be prepared to lose 100% of their investment".
Asked by the committee what investors should look out for in a cryptocurrency that is doomed to fail, Tim Grant, head of EMEA at Galaxy Digital, an asset manager that invests in crypto, said normal institutional investor checks should apply.
"Just like any asset you have to have an investment thesis and a risk management approach that monitors that investment going forward and the risk factors associated with that."
Crypto, as with traditional assets, he added, "can look good with a good thesis at the beginning and then they may be mismanaged or maybe assumptions are made that were wrong and you need to keep assessing them".
In the stable coin world, a clear warning sign is under collateralisation, he said: "You want to be in exchanges where your funds are not being used for any other purpose."
He added: "There are definitively robust institutional frameworks [for investing in crypto assets]. Can we be sure everyone is applying these? That's not clear. But they definitively exist - we are not in the Wild West we were a few years ago."
