The Crypto Crackdown Is Just Getting Started

There was a lot on the Internet when the United States Department of Justice announced last week the founder of Bitzlato. Unpronounceable, unknown and unlike all the much larger fish (such as binance) get titles, bitzlato resembled a small fry, a nothing-burger. The fact that Bitcoin took over after $21,000 seemed to confirm this.

However, that does not take into account the situation as a whole. In the early weeks of 2023, guard dogs have done much. on jan. 3, a joint statement by US bank regulators warned the industry of crypto risks creeping into the banking system. Then came a $100 million settlement with COINBASE Global Inc. over weak internal controls, a lawsuit against the Winklevoss twins’ Gemini and broker Genesis for allegedly selling unregistered securities, and a $45 million settlement with lending platform Nexo (which has ceased US operations). Subpoenas flying.

The wheels of justice are moving slowly—the Gemini and Genesis case came too late for clients to fight for $900 million in frozen funds—but now they're accelerating. Regulators such as the dry industry rightly feel justified by the events of last year, which has seen a widespread loss of confidence in cryptography fail to snowball in a broader economic crisis. The collapse of ftx showed the shortcomings of the industry, but also the advantages of a strict regulation line on stock exchanges, as when the sec stepped in backstage in 2021 to prevent the currency from launching its own crypto loan product. Like an official it last year, the "track is getting shorter and shorter" for undisciplined platforms.

There can be a lot of discussion about whether crypto tokens are more like titles, commodities, fictitious banking or gambling, but the permanent objective is to make sure that crypto problems do not spread through the financial system. While legislative attempts to develop crypto rules designed to prevent another "lehman brothers moment" come up against procedural delays and embarrassing revelations about FTX's history of close connections to capitol, regulators that have a long memory keep an eye on banks' exposure to cryptography as a measure of risk. Silvergate capitalization corporation, already overwhelmed with his ftx exposure, seems to have gotten the message and written down the value of stablecoin assets it bought from meta platforms inc.’s diem — worth almost $200 million at the time — to basically nothing. 

The Bitzlato action is part of this push, with the DOJ citing the exchange’s inadequate anti-money-laundering controls and “substantial” business with US customers — two examples of the kind of regulatory  in the system that missed FTX’s red flags. Carol Van Cleef, a lawyer with a long experience in digital assets, sees a blueprint for future actions, including the US Treasury’s determination that Bitzlato is a “primary money laundering concern,” rendering it effectively an international pariah. It goes further than the SEC.

There has been criticism of regulation. Some fear overreach; others think it counter-productive to try to build guardrails around digital assets rather than stepping back and letting it “burn.” It’s true that crypto is rife with activity that’s more gambling than investing. And it’s somewhat depressing to see that those at the heart of last year’s crypto collapse already have redemption in mind, from Three Arrows Capital to FTX.

But money laundering, fraud, market manipulation and tax avoidance are not self-regulating risks. As pointed out by the European Central Bank's fabio panetta, regulators believe that the costs of unregulated digital assets to society are high and that further action is needed. Repression is just beginning; those who want to plunge back into cryptography, even after taking a bath, should take note. 

More From Bloomberg Opinion:

• Crypto's Hotel California Traps Winklevoss Binoculars: Lionel Laurent.
• Matt Levine's Money Stuff: Crypto Banks Owe Themselves Money
• Gold Is Getting Its Glitter Back: Merryn Somerset Webb

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To contact the author of this story:

Lionel Laurent[email protected]

To contact the editor responsible for this story:

James Hertling[email protected]