Last year, the world witnessed the powerful potential of cryptocurrency as a new asset class.

In a more symbolic sense, blockchain’s central values — like anonymity, decentralization and personal power — were also championed throughout this run, bringing its advocates to new heights of confidence. But beyond the wave of euphoria, experts close to the intricate workings of these blockchain systems began to detail a story showing an asset class in its infancy. 

Ripe at this stage are issues that mature markets — such as equities, bonds and foreign exchange — have long been combating but are largely unaddressed in crypto. Recent activity at Three Arrows Capital, Voyager and Celsius have proven the need for better risk controls, risk management, disclosures and, above all, a regulatory framework for the crypto asset class. 

Issues In Crypto

The Three Arrows Capital (3AC) fiasco exemplified all that’s wrong with the unregulated crypto environment. The story unfolds as follows: 

After amassing a reported $10 billion fortune, most of which was driven by uncollateralized loans, 3AC placed a $200 million investment into LUNA, a stablecoin that had been pegged to the U.S. dollar. When, unexpectedly, Luna’s algorithm deviated from its pegging protocol, the coin’s value fell from $80 to a couple of cents, triggering a significant loss for 3AC and foreshadowing future crypto catastrophes. 

Coupled with a 2022 bear market that crippled their investments in Bitcoin, Ethereum and other cryptocurrencies, 3AC experienced a wave of margin calls from crypto lenders BlockFi, Genesis and Voyageur. Extenuated by failing investments like Axie Infinity, which experienced a $600 million hack, the firm eventually defaulted on its margin calls and filed for bankruptcy. 

3AC’s downfall led to a wave of potent declines in crypto lending platforms. Voyageur filed for bankruptcy after 3AC failed to pay its $670 million, while Blockchain.com, FTX, Genesis, BlockFi and BitMEX all incurred life-threatening losses.

Potential Future Solutions

According to some, these failures have shined a light on the importance of regulated markets and the need to manage counterparty risk, credit risk, liquidity risk, anti-money laundering (AML) and fraudulent activity. 

With proper regulatory guidelines and professional surveillance, the crypto market can finally “grow up,” and move into the adolescent/mature stages of its development. Specifically, regulators envision that the future of crypto will include:

The belief is: If the crypto trading environment wants to ever be taken seriously by mainstream investors, it must begin acting in a far more responsible manner. 

Cboe Works To Bridge The Regulatory Gap 

Some operators are championing the regulatory movement.

ErisX is a U.S-based digital asset spot market, a regulated futures exchange and a clearinghouse. Among the firm’s central beliefs is faith in the power of appropriate regulation, surveillance and monitoring practices to rid cryptocurrencies – and their traders – of market fraud and manipulation.

ErisX Insights claims that centralized exchanges provide a far more secure way to trade in cryptocurrency than their decentralized counterparts.

By being subjected to regulatory oversight by authorities like the Commodities Futures Trading Commission and the New York Department of Financial Services, ErisX believes its platform holds a security standard that its decentralized counterparts cannot replicate and that only through this path can cryptocurrency finally be rid of unethical practices. 

For traders curious or doubtful about ErisX’s quest for regulation, the company is holding a panel discussion on Sept. 20. Click here to stay informed. 

Featured photo by Scott Web on Unsplash

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