The Case for Self-Regulation and Responsible Practices
If the crypto lending industry does not proactively and aggressive align on, and implement, strong financial risk management good practices, regulators will force these upon us, to the entire industry’s detriment.
The past year saw the spectacular collapse of a number of crypto platforms, including FTX, Celsius, BlockFi, and others, including several crypto lending entities. Whilst more than one failure can to some degree be traced to the fall of FTX, the blame for most of the sector’s troubles falls squarely on a lack of strong, responsible financial and operational risk management.
Coming hot on the heels of the instability of 2021-22’s speculative fluctuations, these fiascos have caused significant reputational damage to crypto as a growing and promising segment of the global financial ecosystem.
The Crypto Credit Association (CCA) maintains that cryptocurrency, the use of blockchain, and smart contracts are vital tools in the evolution of financial services towards a more consumer-, business-, and society-friendly activity. We believe that these capabilities provide great value for democracy, transparency, and efficiency.
The overall state of the industry is still immature. The CCA understands that even “traditional finance” is not immune to the effects of greed, irresponsibility, and outright fraud, despite significant regulatory oversight.
However, there is a widespread sentiment that the recent collapse of Silicon Valley Bank was in no small part driven by the relaxation of US custody requirements, which SVB actively lobbied for. Furthermore, even though SVB complied with existing regulations, it did not practice sufficient financial risk management, such as interest rate hedging, or even having a Chief Risk Officer over a period of several months.
This strengthens the narrative, whether correct or not, that the financial industry demands light-touch regulation, while being unwilling to implement voluntary measures to protect its stakeholders.
SVB, FTX, and other recently failed firms had significantly different business models, and sources of financial risk – whether due to liquidity, collateral management, or other factors. More important is what they share:
- All were significant players in their respective areas of activity
- Poor or inexistent financial risk management
- Insufficient regulatory requirements for contingency planning
It remains to be seen what the knock-on effects of SVB’s demise are on global banking and lending. We predict increasing calls for regulators to take a much firmer hand in ensuring financial stability. This will include the crypto sector, to its likely detriment. Regulators will not care whether an entity is a bank, a pure crypto lender, or a hybrid – they will demand compliance with fundamental rules to analyse, track, and mitigate financial risk, across the board.
In the crypto industry, we have already seen forebodings of this in the contentious comments made by Gary Gensler, Chair of the US Securities and Exchange Commission over the past months, the rise in CBDCs, and the proposed EU Market in Crypto-Assets (MiCA) regulation.
It is the CCA’s position that responsible, consistent, and proactive industry self-regulation is necessary to forestall regulatory overreach. This can crush innovation and ultimately hurt consumers. Such overreach, by frequently under-informed and overenthusiastic regulatory and legislative bodies, is inevitable if the crypto lending sector and its participants do not act pre-emptively. Unless we agree on and implement clear codes of conduct, including ethical rules, transparency requirements / mechanisms, and risk management standards, the developed world’s regulators will do this for us.
We thus call for all participants in the crypto lending space to join forces to
- Develop and align on a good practices framework for crypto lending
- Create an industry-led responsible practices certification mechanism for crypto lenders
- Collectively inform and work with regulators to educate and inform them of the crypto industry’s good faith in order to mitigate the impact of potentially highly onerous rules
About the Crypto Credit Association
The CCA, founded in 2022, is the voice of the global crypto lending industry.Our objectives are to strengthen the global crypto credit sector by
- defining and publishing standards
- collecting and codifying good practice
- establishing audit and certification mechanisms for companies in the crypto credit space
Informing regulatory bodies to encourage the development of consistent rules