Should the Crypto Industry Start Asking For Regulation at This Point?

For most of the history of the cryptocurrency industry, anything that brought the market too close to so-called incumbent institutions was anathema to true believers. That's part of the reason that so many crypto evangelists chafed at central governments' plans to launch nationalized crypto projects. It's also part of the reason why you'd see such vehement pushback whenever experts would call for the regulation of the industry.

However, it'd be absurd for any crypto fan to look back at 2022 and say that it was a banner year. It was a year full of controversy and collapses—one that shook the industry to its very core. And in its wake, the entire idea of cryptocurrency is beginning to lose favor among the masses. All of which begs the question—should the crypto industry think about knocking on regulators' doors to ask for some assistance?

To arrive at an answer, it's necessary to review the year that was in crypto and to take a look at the effects it had writ large upon the industry. Only then can we come to a sensible conclusion of whether 2023 should be the year that crypto goes legit—for lack of a better term—and accepts the oversight of established regulators. Let's get started.

When I mentioned that 2022 wasn't the best year for the crypto industry, I may have undersold how bad it was. In fact, it would take much less time to list the things that went right in crypto rather than what went wrong last year. Or, I could sum up the year in one word: disastrous.

Bitcoin shed more than half of its value in 2022 while dragging down almost all other crypto coins in its wake. Ethereum, its main rival, took an especially hard hit, with the current Ethereum price hovering at about 25% of its late 2021 high-water mark. Then came the collapse of Luna and TerraUSD, which triggered the subsequent failure of the massive crypto hedge fund Three Arrows Capital (3AC) and the lending project Celsius Network. 

And if that weren't enough, 2022 also witnessed the most stunning scandal in its short history—the collapse of leading crypto exchange FTX. It's a scandal that simultaneously led to the evaporation of almost $9 billion in assets, the extradition and arrest of its founder, criminal charges against multiple other executives, and the renaming of a Miami sports arena.

Obviously, the crypto community and the general public didn't exactly take the torrent of bad news very well. The result was a massive selloff that accelerated losses and sucked vital capital out of the industry. All told, the industry as a whole lost $1.486 trillion in value last year. The drop left the total market valuation sitting at about one-third of its peak in late 2021.

If you can believe it, though, loss of capital isn't the biggest problem that the crypto industry faces. That title goes to the severe damage to its reputation wrought in 2022. That damage is already translating into some troubling public opinion data. First, a late 2022 poll found that 60% of Americans now consider crypto investing highly risky. And if that's not bad enough, a deeper dive into the data revealed something arguably worse.

It's that the biggest drop-off in crypto confidence seems to have happened among millennials. That's a major problem for two reasons. First, it's that millennials were and are crypto's main demographic target, at least until more Gen-Z'ers start having money to invest. And second, the millennial generation is on track to inherit some $68 trillion in assets from their parents and grandparents by 2030. In other words—they're the ones who will control all of the money the crypto industry needs to survive and grow.

All of the foregoing leads me—and hopefully you—to question whether or not the crypto industry can recover from its recent string of catastrophes. And my answer to that question is yes. However, I believe that it's going to require the industry to do something it's historically resisted: accept the oversight of regulatory authorities.

Now, some onlookers are already openly stating that the crypto industry will see increased regulation in 2023, whether it wants it or not. However, they hypothesize that the increase in regulation will play a key role in helping the industry regain investors' trust. I disagree.

For an explanation as to why, you need look no further than the financial crisis of 2008. After banks played fast and loose with depositors' money and saw their houses of cards collapse along with the housing market, regulators stepped up their oversight. They also hit the banks with a raft of new regulatory requirements meant to keep them from repeating their mistakes.

The trouble? None of that did anything to restore trust in the banks. By 2015, the public's trust in the banks remained at an all-time low. And here in 2023, I've seen no data to suggest that those feelings changed very much. The point is, people aren't going to start trusting the crypto industry, even if regulators rush in to build guardrails for the embattled crypto businesses.

However, those guardrails will do something else. They'll help keep the crypto industry from destroying itself, which it's shown a disturbing tendency toward of late. Over time, greater stability will help erase the stain of 2022 from people's minds. And even if they don't trust the crypto industry, they'll at least feel more comfortable with its perceived risks.

The bottom line here is that nobody expects crypto companies to become fans of regulation overnight. However, they should be beating a path to regulators' doors to find ways to work with them nonetheless. Accepting regulation would signal the industry's willingness to be accountable to investors, and that it recognizes its internal controls and safeguards aren't enough.

And let's face it—anyone within the crypto industry that doesn't recognize the need for regulation after the past year's calamities is either blinded by crypto idealism or is lying. And if it's the latter, we can only hope that it's not in service of another FTX-level shell game. If it is, then we're all in for a tough 2023, and even regulators couldn't possibly step in fast enough to stop it.