(Credit: Dan Kitwood/Getty Images)
The days of wild west cryptocurrency transactions may be coming to an end. Lawmakers in the US have started asking regulatory agencies and large crypto firms for details on how they work to protect consumers from scams. This could be the first step in deploying a regulatory framework that would tamp down some of the crypto world’s worst excesses, but the nature of crypto will make it harder to police than traditional finance.
Earlier this year, President Biden called on regulatory agencies to develop a plan for regulating digital assets, giving them 180 days to do so. In the intervening months, crypto prices have cratered, major exchanges have crumbled, and scams are only getting more prevalent. This week, the US House Economic and Consumer Policy subcommittee sent letters to four government agencies, including the Department of the Treasury, the Federal Trade Commission, the Commodity Futures Trading Commission, and the Securities and Exchange Commission. They also queried the largest crypto exchanges like Binance, Coinbase, and Kraken.
The subcommittee letters ask for details on how each entity works to safeguard consumers against fraud. US regulators mostly have taken a hands-off approach with crypto thus far, fearing over-regulation could stifle innovation, but the time for action may be nigh. The FTC estimates that consumers have been hit with more than a billion dollars in fraud losses over the past 18 months, and the FBI announced this week that criminals had siphoned $1.3 billion in cryptocurrency from decentralized finance (DeFi) in the first quarter of 2022.
The #FBI warns that cyber criminals are increasingly exploiting vulnerabilities in decentralized finance (DeFi) platforms to steal investors cryptocurrency. If you think you are the victim of this, contact your local FBI field office or IC3. Learn more: https://t.co/fboL1N17JN pic.twitter.com/VKdbpbmEU1
— FBI (@FBI) August 29, 2022
The letters give agencies and exchanges until September 12th to reply, and they’re expecting a lot of detail. In particular, the subcommittee seeks documents dating back as early as 2009 that show how each has worked to prevent fraud. It’s possible that future legislation will give consumers some protection from the worst scams like “rug pulls,” in which those behind a crypto project transfer away the funds and abandon users with now-worthless digital assets. This is a depressingly common occurrence in the world of NFTs, and consumers currently have little to no recourse. The current lack of regulation also means consumers are “unsecured creditors” in the event of an exchange bankruptcy — for example, Celsius. With no legal guarantees, users may never see their funds returned.
Avoiding government regulation is important to some crypto enthusiasts, but the writing may be on the wall for large exchanges. The anti-fiat crowd can retreat to self-hosted wallets if they want to live in the wild west, and that will give scammers a space in which to operate. The US government is also limited in what it can do to combat crypto scams in other corners of the world. There will be scams as long as crypto has value, but that doesn’t mean the government wants to let them run rampant.