The crypto industry has had a lot of activity during the past year. $50 billion was instantly lost from the market when the Terra ecosystem and its TerraUSD (UST) algorithmic stablecoin collapsed. And more recently, FTX, a stock exchange that many believed to be “too big to fail,” collapsed. There hasn’t been a shortage of drama in this area, as well-known enterprises and projects have vanished along with investors’ money.
Whether this is a good thing is a topic of significant discussion in the area. Financial regulation exists to safeguard consumers from being taken advantage of and duped by a variety of financial operators as well as to advance the economy’s general health. And it is obvious that the effectiveness of the current financial rules varies greatly in these areas. Furthermore, it is uncertain what kinds of restrictions might be implemented that would actually be advantageous for the sector and its clients.
Given the events of this year, it is certain that every major jurisdiction will give space policy considerable consideration in the near future—not decades, but on a time scale of a few months to a few years at most. Even before the current FTX fiasco, most industry analysts seemed to understand this, but now it is abundantly clear.
We should perhaps concentrate our efforts elsewhere to ensure that crypto puts its house in order rather than on regulation. The three main advantages of crypto rating agencies, which are community-driven organisations that evaluate projects, are outlined below, along with how they might address crypto’s problems.
There can be many risks for participants to handle, even though some of the initiatives that are emerging are innovative and push the limits of technology. Early breakthroughs in cryptography were based on the cypherpunk philosophy, which advocates anonymity. However, when you combine this anonymity with a sizable population of consumers who are often gullible, it fosters an ideal climate for fraud, con games, and pyramid schemes.
The cryptocurrency industry is dynamic and quick-moving. Nearly 2,000 new cryptocurrencies were generated between November 2021 and November 2022, increasing the total number of cryptocurrencies by almost 25%. There are always new initiatives and tokens emerging.
Considering how time-consuming it is to enact regulation, this might be a problem for regulators. For instance, it took more than two years to develop and adopt the Markets in Crypto-Assets framework for the European Union. The time it takes to review and put defensive measures into place will have passed by the time new threats have emerged.
The polar opposite of this would be crypto rating agencies. They would lead the field in innovation. At a rapid pace comparable with the development of these new products, they might offer consumers a comparatively objective, open-minded analysis of the algorithms, structures, communities, dangers, and rewards behind diverse products.
The best illustration of how this would function was Terra. Some in the galaxy were aware of Terra’s flawed tokenomics, which ultimately contributed to its demise. People without backgrounds in tokenomics and quantitative finance wouldn’t understand it as well. Regulators also had little knowledge of Terra before to its collapse, making it impossible for them to safeguard investors. Investors may quickly become aware of the fundamental problems in projects and decide whether they want to accept the risk by having experienced, reputable authorities examine cryptocurrencies and businesses in the field.
- After FTX, rating agencies—not regulators—can help reestablish trust in crypto
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