In today’s Exponential Investor:

  • Why is crypto like cocaine?
  • Who really regulates crypto?
  • What happens next for regulation of crypto?

Editor’s note: It is not often that Exponential Investor makes a diversion into the often-arcane world of regulation – and particularly regulation that affects new markets.

My colleague James Early, a financial guru and editor of Southbank Investment Daily, has penned a concise and elegant essay on what is happening at the moment with the regulation of the crypto world. I feel that it is too good not to share. Enjoy…

I need a lot of cocaine.

– Sigmund Freud

It wasn’t just Freud, who wrote a long treatise – Uber Coca – on cocaine’s virtues. Merck began producing cocaine in the 1860s, partly to help soldiers beat morphine addiction. By the 1880s, the US Surgeon General of the Army was endorsing cocaine for medical use, even claiming it wasn’t addictive. William Stewart Halsted, an American physician who pioneered the mastectomy, rubber glove use, and the residency training system – called so because the surgeons in training were residents at a campus building of the Johns Hopkins Hospital and medical school that Halstead co-founded after losing his prior position due to cocaine addiction – was, like many of his compatriots, addicted to a fully legal substance at the time.

Even Coca-Cola began with a touch of legal cocaine.

But after 12 years, Freud – whose nose was so blocked from snorting cocaine that he needed an operation to open his nasal passages – kicked the habit after botching a surgery while, you guessed it, high on cocaine.

Eventually, people began to realise that whereas cocaine had a legitimate benefit as a local anaesthetic, it had a lot of other less legitimate “benefits”, too. The UK outlawed it in 1920 and the US in 1914.

Regulation can change everything

If you were in the cocaine business in 1913, you probably didn’t expect how quickly your life was about to change. (Presumably you either made less money or began operating illegally – or both.)

Ditto for those in the prostitution industry, which was generally legal in the US and Europe until after World War II.

In fact, from slavery to pollution to bloodletting, history is littered with practices that went from mainstream to non-existent – or to greatly reduced, or to under the table – with the stroke of a pen.

I’m going to unscientifically guess that two things have been simultaneously true about regulatory changes:

  1. Pre-regulation, the prospect of regulation was talked about by those in the industry, even if the actual reality of regulation didn’t feel “real” in a day-to-day sense  
  2. Post-regulation, those in the industry would say that regulation came on faster, sooner or more severely than they’d expected.

Regulation depends on the minds of a few people and is very difficult to predict

I’m not winding up to a polemic on cryptocurrency regulation. I’m not a cryptocurrency expert. I’m especially not a regulation-of-cryptocurrency expert.

I don’t own much cryptocurrency – just a little bitcoin.

I don’t have strong opinions (see lack of expertise above) on how cryptos should be regulated.

But I do know a bit about history. And a bit about bubbles. And a bit about the types of people – and their strengths, weaknesses, and motivations – participating in crypto.

And so I think it makes sense, every once in a while, to turn our antennae to the prospect of regulation.

Near term

US: who’s in charge?

FTC: we all know that cryptocurrency is awash in scams, and scams are what the Federal Trade Commission (FTC) aims to shut down.

SEC: but wait – if many cryptocurrencies are securities, then the Securities and Exchange Commission (SEC) needs to regulate them and their exchanges. Then again, bitcoin, which is by far the biggest crypto with something like 40% of total crypto market cap (see below), may be a commodity instead of a security, according to current SEC head Gary Gensler, and for whatever it’s worth, prior head Jay Clayton to boot.

Source: CoinMarketCap

CFTC: well, to whatever extent cryptos are commodities, the Commodities Futures Trading Commission shall regulate – and the agency has already got busy punishing an exchange (which is also the SEC’s job, remember?).

Congress: get 535 lawmakers into a room and you can’t stop them from making laws about cryptocurrency. Apparently more than 50 crypto bills (proposed laws) have been introduced.

Federal Reserve: the Fed seems to play a weird and sometimes-thankless role in crypto. Sure, it seems fair for the Fed to cry foul when crypto brokerage firm Voyager claims it has federal deposit insurance when it really doesn’t. The Fed must also noodle on creating a US central bank digital currency (CBDC). But then some in Congress want to force the Fed to let sketchy crypto firms use its payments-and-settlement functions, which seems pro-crypto innovation (a good thing) on one hand while perhaps potentially complicating vetting, counterparty risk considerations, and the like (a headache, if you’re the Fed) on the other. To top it all off, if you’re the Fed, and you appear to be moving too slowly for a newfound crypto bank’s liking, you get sued! I never thought I’d feel so much sympathy for a central bank.

UK: governmental schizophrenia

Relative to the US, the UK’s cast of regulatory characters is smaller. The Financial Conduct Authority (FCA) started regulating crypto assets. Well, mostly, and things may change. It’s also possible that Parliament could pass new laws on crypto assets as well – perhaps it’s likely in time, or sooner, but isn’t feasible at this very moment, leaving the FCA in charge. And speaking of the FCA:

The FCA banned cryptocurrency derivatives.

The FCA banned Binance, the world’s largest cryptocurrency exchange.

The FCA banned cryptocurrency ATMs.

The FCA banned certain types of cryptocurrency advertising, and severely restricted others

This sounds wet blanket-y. I guess it is wet blanket-y. The FCA skews more conservative than regulators in the United States and in Asia: indeed, it may be shooting first and asking questions second with crypto. To the FCA’s credit it’s hiring more crypto analysts and spending money on consultants to be less behind the curve.

But the FCA is not Britain’s only voice.

Rishi Sunak may be in limbo, but he had instructed the Royal Mint to make a non-fungible token (NFT) by summer, in a quest to make Britain into a crypto asset leader. That didn’t happen. It’s more than Sunak who wants this, too.

But it doesn’t take a genius to see that the FCA’s tough-on-crypto stance seems potentially at odds with Sunak’s and any others’ motivations of making the UK a red-hot bastion of crypto innovation.

My money is that the wet blanket prevails.

Personality conflict

There has long, if not always been, an existential problem with financial regulation. Finance pays well. Those whose minds are clever at finance tend to be drawn to roles where they can use their talents to make the most money.

Say “regulator” and you conjure up an entirely different personality set.

This dichotomy is especially true of crypto. Crypto is new and cutting edge.

People who take jobs with government regulators are not necessarily passionate about things new and cutting edge.


Talking to crypto enthusiasts about the risk of CBDCs killing private cryptos goes about as well as telling Freud that he’s going to have to give up his nose candy.

They know more than I know, and they may be right.

T. Rabi Sankar, the leader of the Reserve Bank of India, says conclusively that they’re wrong. He says point blank that CBDCs will kill private cryptos.

If he’s right, then we’re all dancing in a fleeting illusion. 

I have no idea if he’ll end up right.

Economist Nouriel Roubini – famous for calling the Global Financial Crisis of 2008 – is a fellow private crypto critic who has long believed CBDCs will crush bitcoin.

There are plenty of counterarguments. They may be right. But I have generally seen these counterarguments from people – like Grayscale Bitcoin Trust in the earlier link – who are both a) informed about crypto and b) have a vested interest in making counterarguments.

This doesn’t make their logic incorrect. But I’d love to see a strong “CBDCs won’t kill private crypto” treatise put forth by someone with nothing to gain by putting it forth.

Quick take

My general feeling is that with all the scams and dumb money in crypto, we absolutely need coherent regulation. But we don’t need ham-fisted regulation, which tends to be what you get when you ask slow-moving, conservative-by-nature regulatory types to move quickly to regulate fast-moving, not-conservative-by-nature things.

I think Hester Peirce from the US SEC is right that regulators have largely dropped the ball.

We can only hope that they get it back.

James Early
Editor, Southbank Investment Daily