The Bitcoin world has been rocked by the news of FTX's collapse. The price has plummeted, and the main stream news media is having a field day claiming the end of Bitcoin is nigh. While its easy to brush aside these views based on historical performance, there is an important lesson here. Bitcoin needs regulation, or rather the financial institutions that have sprung up to capitalize on Bitcoin needs regulation.
What Went Wrong
First off, let's explore what happened with FTX. For those who have been having trouble following, FTX is an exchange where you can turn Bitcoin and other crypto into fiat currency (cash) or vice versa. FTX had been a booming exchange until very recently, even getting Larry David to do a Super Bowl commercial:
But they flew too close to the sun. Basically, FTX was acting like a bank and ran into a liquidity problem, it didn't have enough actual crypto on hand to cover everyone's crypto they stored on the platform. As this was revealed over a period of 10 days there was a run on FTX, and it couldn't find a buyer to solve the issue, Binance another exchange considered it but backed out, and so it collapsed. People who kept their crypto on the exchange have lost thousands of dollars. Its bad, and worse, it could happen to any exchange.
The Wrong Takeaways
It can be easy to say "not your keys not your Bitcoin, shouldn't have kept your Bitcoin on an exchange" and be done with it. But while it is easy, its the wrong response. We can all pretend that the libertarian world a few vocal crypto users like to spout will actually come to be, but we actually live in the real world. And the real world needs financial institutions of some kind. Bitcoin is no excpetion.
If Bitcoin is to grow it needs institutional intrest, if it is to go mainstream, average users need to feel safe. After FTX's collapse, any institution or person has a major right to feel unsafe about crypto. If you keep your Bitcoin on an exchange you could lsoe it at any moment. That's bad.
The Actual Takeaways
The answer instead is regulation. And its something even self-described libertarians can get behind. Take Cynthia Lumis, Republican Senator from Wyoming. Now I don't care for most of her political ideas, but she is a big bitcoin supporter, and I can get behind that. And what is she doing? Pushing for Bitcoin regulation:
The FTX bankruptcy wouldn’t happen under the Lummis-Gillibrand bill. Here’s why:— Senator Cynthia Lummis (@SenLummis) November 14, 2022Seriously, check out the Twitter thread, it lays out some useful stuff. What is the bill she and Senator Gillibran, Democrat from New York, have put together? It basically lays out what regulatory bodies in the US have oversight. This stops confusion between Federal agencies who have been fighting amongst eachother over who controls the crypto market regulation. As part of this it explicitly protects people and their crypto which might be stored on an exchange. That would help prevent FTX's position by making it so they couldn't use their client's money as freely. Additionally, it would set up the ability for states to establish safe zones to allow new crypto projects 2 years to grow under relatively lax regulatory framework. Encourage the growth, and then make sure that growth is useful.
And it is important to emphasize the bipartisan nature of this bill. There are few people who like both of the Senators. Gillibrand has gotten a name as a liberal Senator, while Lummis, the more junior of the duo, was alas one of the Senators who voted against certifying the 2020 election. But they have come together to craft this bill, recognizing the need from both sides of the aisle to set up a safe space for bitcoin and crypto to grow in the US.
The passing of this bill is vital, even more so now following FTX's collapse. We should applaud Senators Gillibrand and Lummis for their work, as well as the many other Senators who are putting forth bills to set up a regulatory framework.
Let's hope with the new Cingress this bill will pass, it certisnly seems likely in the Senate, although its chances in thr House, now that the Republicans have the barest of majorities, are slim. Let's hope for the best.
This is a companion discussion topic for the original entry at https://insights.blockonomics.co/yes-bitcoin-needs-regulation-ftx-proves-it/