Crypto crackdown will continue, but innovation can survive

The crypto crackdown is ongoing, and complaining about it won’t make it stop; smart innovation will.

It’s safe to say that the crypto space is in the midst of a crackdown, with the Commodities and Futures Trading Commission joining the Securities and Exchange Commission in suing both Binance and CEO Changpeng Zhao on multiple counts. Advocacy and trade groups have rightly expressed outrage, disappointment, and general dissatisfaction with the current state of crypto regulation in the United States. This reaction is understandable, but will do absolutely nothing to deter what appears to be a determined effort by regulators such as Gary Gensler to single-handedly enforce the rules via a flurry of enforcement actions and court cases.

Well-meaning organizations, including Coinbase which has 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 on the entire sector. In a further blow to the industry, the collapse of Silicon Valley Bank and Signature Bank, and general banking fears as a whole, have been attributed (in part) to the crypto winter. Furthermore, some of the more blatant speculation and get-rich-quick schemes that have proliferated during the 2021 bull market have not made the sector more expensive for policymakers or regulators, leaving a sour taste for many.

Fair or not, these are the attitudes that crypto developers and entrepreneurs are facing for the foreseeable future. Offshoring and headquarters abroad is an option that some companies choose, but the fact remains that the United States remains the deepest, most liquid and easily accessible financial market in the world; it is not a viable option for all businesses.

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

Transparency is essential. Creating and growing a culture of transparency is always good advice for any start-up or new business, and crypto is no exception to this rule. While not a panacea for the issues that continue to be headwinds for the sector, creating a culture of transparency is imperative for future success. While it can take many forms, transparency should center on a few fundamental pillars as new tokens (for example) enter the market; what is the token used for and designed, who are the main parties involved in the development and distribution of the token, and what are the financial risks/opportunities associated with this token?

Focusing on the stablecoin industry, which is in the midst of its own regulatory crackdown, the importance of transparency has never been greater. Specifically, questions are asked (although perhaps they should have been asked before) about exactly how reserves are accounted for, reported and controlled. These are tough questions, but ones that should be welcomed by honest actors in space; ignoring or brushing them off will only further inflame the doubts that have come to the fore.

Non-financial use cases. Precisely or not, the entire crypto-asset industry has become synonymous with price volatility, rapid wealth creation and even more dramatic wealth destruction. These very trends are one of the main reasons why retail investors have become drawn to the crypto space, but are also a driving force behind many ongoing crackdowns and regulatory enforcement. Profits are always something any business or group will strive to produce, but it is important to balance the desire for profits and returns with the potential downsides if these efforts fail.

Although not as exciting as generating significant financial returns, it is worth noting that many enterprise applications of blockchain and crypto-assets – undertaken by many of the world’s largest companies – have often little to do with coin or token prices. Rather, these applications tend to focus on leveraging the capacity of blockchain and tokenized assets to facilitate the exchange and transfer of information. In other words, enterprise applications have tended to go back to the origin of blockchain and crypto-assets, instead of focusing on increasing valuations as quickly as possible.

Trusting those who don’t trust. While many industry advocates and proponents have long espoused the trustless nature of blockchain and cryptoassets, the reality is more nuanced. Especially after the collapse of FTX, the enforcement actions taken against Kraken, Binance, Coinbase and others, trust and confidence in the industry is drastically diminished. Added to this are the multiple instances of fraud, scams, and other unethical actors that have resulted in billions in losses for investors. Either way, the broader blockchain and crypto space needs a reputation reset.

Whatever form this ultimately takes, there is certainly a growing need and desire for more trust in the technologies themselves as well as in the organizations operating in space. They may have started as a trustless alternative, but companies in this space need to focus on rebuilding and increasing the trust the market places in them.

Smart innovation, creating products with real value for individuals and institutions, and focusing on the long term will pave the way for a stronger and more sustainable crypto industry in the future.