Crypto Crackdowns Will Continue, But Innovation Can Survive

Professor, entrepreneur, CPA, and enthusiast for everything blockchain

The crypto crackdown is on, and complaining about it will not make it stop; smart innovation will.

It is safe to say that the crypto space is in the middle of a crackdown, with the Commodities and Futures Trading Commission joining the Securities and Exchange Commission by suing both Binance and CEO Changpeng Zhao on multiple counts. Advocacy and trade groups have, rightfully so, expressed ongoing outrage, disappointment, and general discontent with the current state of crypto regulation in the United States. This reaction is understandable, but will absolutely not do anything to deter what seems to be a determined effort by regulators such as Gary Gensler to single-handedly enforce rules via an avalanche of enforcement actions and court cases.

Well-meaning organizations, including Coinbase which spent millions of dollars and years of management time proactively engaging with regulators and policymakers, find themselves lumped in with bad actors as the shadow of FTX casts doubt over the entire sector. In an additional blow to the industry, the collapse of Silicon Valley Bank and Signature Bank, and general banking fears at large, have been assigned (in part) to the crypto winter. In addition, some of the more blatant speculation and get-rich-quick products that proliferated during the bull market of 2021 did not endear the sector to policymakers or regulators, leaving a sour taste for many.

Fair or not, these are the attitudes crypto developers and entrepreneurs face for the foreseeable future. Relocating and headquarters overseas is an option some firms are taking, but the fact remains that that United States remains the deepest, most liquid, and most readily accessible financial market in the world; this is not a viable option for all firms.

As with any other emerging space, peaks and troughs come and go, so let's take a look at a few things that entrepreneurs should keep in mind when developing, building, and promoting the next stage of crypto applications.

Transparency is key. Creating and developing a culture of transparency is always good advice for any start-up or new enterprise, and crypto is no exception to this rule. While not a cure-all for the issues that continue to serve as headwinds for the sector, building a culture of transparency is imperative for future success. Although it can come in many forms, transparency should be centered around a few core pillars as new tokens (for example) enter the market; what is token intended and designed to do, who are the primary parties involved in the development and distribution of the token, and what are the financial risks/opportunities connected to this token?

Honing in on the stablecoin sector, which is in the midst of its own regulatory crackdown, the importance of transparency has never been more prominent. Specifically, questions are being asked (although possibly should have been asked previously) about how exactly reserves are accounted for, reported, and controlled. These are rigorous questions, but should be welcomed by upstanding actors in the space; ignoring them or brushing them off will only further inflame doubts that have come to the forefront.

Non-financial use cases. Accurately or not, the entire cryptoasset sector has become synonymous with price volatility, rapid wealth creation, and even more dramatic wealth destruction. These very trends are a major reason why retail investors have become attracted to the crypto space, but is also a driving force behind many of the current regulatory crackdowns and enforcement actions. Profits are always something that any business enterprise or group will strive to produce, but it is important to balance the desire for profits and returns with the potential downside should these efforts fail.

While not as exciting as generating large financial returns, it is worth noting that many of the enterprise applications of blockchain and cryptoassets - being undertaken by many of the worlds largest companies - often have little to do with pries of coins or tokens. Rather, these applications tend to focus on leveraging the ability of blockchain and tokenized assets to facilitate the exchange and transfer of information. In other words, enterprise applications have tended to harken back to the origin of blockchain and cryptoassets, versus focusing on increasing valuations as quickly as possible.

Trusting the trustless. Although many advocates and supporters of the sector have long espoused the trustless nature of both blockchain and cryptoassets, the reality is more nuanced. Especially after the collapse of FTX, enforcement actions being taken against Kraken, Binance, Coinbase, and others, trust and faith in the sector is much diminished. Compounding this are the multiple cases of fraud, scams, and other unethical actors that have led to billions in investor losses. Regardless, the wider blockchain and crypto space is in need of a reputational reset.

No matter what form it ultimately takes there is definitely a growing need and desire for more confidence and trust in both the technologies themselves as well as the organizations operating in the space. They might have started as a trustless alternative, but firms in this space must focus on rebuilding and increasing the trust placed in them by the marketplace.

Smart innovation, building products with real-world value for individuals and institutions alike, and focusing on the long-term will set the stage for a stronger and more sustainable crypto sector going forward.