- Grassroots-led vigilantism in the cryptocurrency space appears more effective than regulatory intervention
- Nature of blockchain technology is such that regulators and the industry at large are better off working with industry stakeholders than trying to bully them into submission
In May 2019, one of the world’s biggest cryptocurrency exchanges Binance experienced a “large-scale security breach,” where hackers stole 7,000 Bitcoin, worth over US$40 million at the time, but over US$337 million today.
Without flinching, Binance CEO Changpeng Zhao or “CZ” as he is better known, pledged to cover Binance users for the full extent of those losses, no questions asked.
When decentralized finance project PolyNetwork was hacked earlier this month, it pleaded with the Ethereum miners not to validate the malicious transactions and called on CZ and Tether to invalidate the proceeds of the hack.
The PolyNetwork hacker relented and ultimately returned the hacked cryptocurrency, changing their story to allege that they had always intended not to keep the proceeds of the hack.
Throughout the entire PolyNetwork hack, a string of blockchain analytics firms were monitoring the movements of the hacked cryptocurrencies across the blockchain, making it almost impossible for the stolen funds to escape the watchful eye of service providers.
As the cryptocurrency space has grown, evolved and matured, just like America’s Wild West, Sheriffs and vigilantes have emerged to enforce their own brand of justice.
And while hacks and fraud still occur with an unfortunate regularity, the grassroots-led efforts to police the space have proved far more effective than any financial regulator.
Which is why the concession by the U.K.’s Financial Conduct Authority last week that Binance was “not capable of being supervised” marked a welcome recognition of the challenges that regulators face in overseeing the cryptocurrency space.
The FCA instead decided to warn investors of the “significant risk” of continuing to trade with Binance, as it was outside the regulatory umbrella.
Yet these are not risks that most cryptocurrency investors don’t already contend with on a daily basis.
When Binance was hacked in 2019, it was under no obligation to make traders and investors on its platform whole and could have easily cited force majeure.
But credibility means everything in the cryptocurrency space, and Binance, rightly so, determined that 7,000 Bitcoins was a small price to pay for their reputation as the world’s most heavily used cryptocurrency exchange.
Yet cryptocurrency investors and traders relying on the largesse and magnanimity of exchanges and their leaders isn’t a long-term solution either.
And as cryptocurrencies continue to rise in adoption and price, more investors are likely to come into the fold.
Which is why authorities like the FCA are at a unique crossroads.
Instead of objecting and alienating cryptocurrency exchanges like Binance, authorities should work together with stakeholders to find a means to govern and provide more certainty to investors.
Exchanges like Binance would stand to benefit if more retail investors were assured of their ability to withdraw their cryptocurrencies safely and freely.
And regulators eager to prevent cryptocurrencies from being used to facilitate criminal activities or launder money would find it far easier to deal with a few key exchanges where the bulk of liquidity lies than an entire sector.
In this regard, the FCA’s concession that Binance is beyond the long arm of its laws should be an opportunity for all stakeholders to gather at the table and break bread.
Binance has already gone on record to demonstrate that it is committed to being compliant and working with authorities, and regulators who recognized the difficulty behind policing the space should accept that olive branch, failing which the entire industry loses.
