In this episode of Adam Talks, IRA Financial’s Adam Bergman Esq. introduces a new concept about who is in the best position to regulate the cryptocurrency market.
Who Should Regulate Cryptos? A Bold New Solution
Hey everyone, Adam Bergman here, tax attorney and founder of IRA Financial. On today’s Adam Talks, going to introduce a new concept to what organization or who is in the best position to regulate the cryptocurrency market. So, I’ve thought about this for a long, long time and I’ve decided to kind of put my solution out into the general public; talked about this a lot with colleagues and friends who all said, hey, this is a really smart idea, I don’t know why you don’t say anything and talk about it on one of your podcasts. I said, well, I don’t know, I’m kind of focused more on the tax side of alternative assets, retirement accounts; not really sure I’m going to have a chance to do a podcast on a topic that’s kind of not a self-directed retirement topic.
But, now that Thanksgiving is over and it’s kind of a lull in terms of end of year tax planning, which I’ll get to in the coming podcast, I thought, hey, why not on today’s episode? This is a great chance to share my thoughts.
So, who do I think should regulate cryptos? Well, I think you’ve got to break down the cryptocurrency market into two components: the exchanges and the coins. And my concept and solution is don’t focus on the coins, like Bitcoin, Ethereum. There is very, very little loss or fraud that happens on the coin side, right other? Than Luna Terra, which was a stablecoin failure; it was basically a technology failure which pegged the Terra and Luna coins together. And the concept was that, hey, if one went up, the other one would go down. It would kind of balance each other out. But the algorithmic stablecoin concept for Terra and Luna didn’t work and it collapsed, okay? So, that is a failure of cryptocurrency, but I’m not sure that’s something the SEC or the CFTC Commodity Features Trade Commission would have solved that, right? That’s literally an inherent flaw in the actual cryptocurrency, in the smart contracts that were the foundation of the Terra Luna coin. And even Disclosures, SEC filings wouldn’t have solved that issue.
So, my focus is, hey, let’s focus on the exchanges. I’m not as worried about fraud on the coin side, it happens, right? At the same time, we also have fraud on securities, stocks, right? Whether they’re large cap, middle cap, or small cap, there’s all kinds of securities frauds that occur on a quarterly basis. Companies as big as Enron to small as penny stocks, where you have accounting fraud irregularities, things like that; false statements that the FCC has control over, but it still occurs. Now they do police it and they hopefully punish the culprits, but nevertheless, it still happens.
The big issue of cryptocurrency and the FTX debacle show this is the exchanges. The exchanges, even the US exchanges, are regulated by the states, right? Whether it’s a New York bit license or various states where these exchanges have to register, these state agencies, these state banking divisions, do not have the depth, they don’t have the manpower, and really don’t have the expertise to really dive deep into these exchanges and make sure they’re safe, okay? And that’s been proven out by a number of exchanges. Now, the FTX was a different scenario because that was a foreign-regulated exchange by the Bahamas, and obviously there was a huge failure, but we need to look forward to the US exchanges and make sure an FTX never happens to any major US exchange.
So, how do you solve that? How do you fix that? I don’t think the way we’re doing it’s going to work. Nothing against New York state or any other state regulatory agency, again, I just don’t think they have the capacity, the knowledge and depth to really make a difference. That’s really not their strength, that’s not their specialty and I definitely think there’s holes in their potential regulation of these exchanges and we see what’s happening now; there’s over $3 billion of hacks that have happened to exchanges, both centralized and defi, and we need to make sure that we greatly minimize that, because if we don’t, there’s going to be a massive amount of consumer loss and a massive amount of loss of trust in these exchanges, which will end up killing the cryptocurrency market.
So, if you care about cryptocurrencies and care about the future and the technology of smart contracts and blockchain, then you need regulation. Some of these folks out there are like, no regulation, everything defi, decentralized, no banks, no government agencies. Well, sounds great on paper, but wait ’til you get hacked and you have no one to turn to and you just lost all your money. It’s not sustainable and there’s no future. It may solve your feelings against government controls and fences and borders, but it’s not a reality. No one’s going to adopt that type of system because there’s no backstop for losses and it’s too risky. But, there is one agency that I believe can solve the cryptocurrency regulatory issue, and that’s the OCC, the Office of the Controller of the Currency.
Now, this is the agency that regulates banks, right? I know a cryptocurrency exchange is not a bank. We know cryptocurrencies are not currency, they’re property, as per notice 2014-21. But, from a regulatory standpoint, I think we’re best served to have an agency that’s regulated banks since 1863, that has experience with national banks, nationwide systems of banking institutions, and they can ensure national banks are safe and sound and they do that, and they do a great job, right? The hallmark of our US financial system is the banking system. We trust the banking system. We believe that when we put a dollar or a million dollars or $100 million away in the bank, it’s safe. Even on top of FDIC insurance, which is $250,000, we feel good that if our million dollars are in the bank, the banks not going to collapse; or Mr. J. P. Morgan is not just going to steal our money like SPF at FTX. The Jamie Dimon of JP Morgan is literally just not going to steal all our money, okay? We have faith, good founded faith, in our banking system. So, that’s what the cryptocurrency market needs. It needs stability, it needs oversight and it needs a body that has the expertise to do this. And I believe it’s the OCC.
Now interesting enough, the OCC is not a governmental agency, okay? It essentially is self-funded. The banks that are the ones that receive these audits, pay for the audits, okay? So, it’s not going to actually add any budget, any amount of increased budget to the federal or even state government. This is self-funded and this institution has the expertise in this area, okay? This is what they do and you can go on their website and learn more about the OCC. But they supervise 821 national bank charters, 53 federal branches and agencies, 284 federal savings associations. In total, the OCC supervises approximately $14 trillion in financial assets, okay? So, we know they can do it. They provide high quality, fair and balanced supervision of chartered banks. “Our well-trained examiners conduct onsite reviews of banks and provide ongoing supervision of a bank’s operation.” Hey, sounds familiar, right? Sounds like something all crypto exchanges can use, okay? They’re the primary regulator bank charter on the National Bank Act. The OCC issues rules and regs that governs the banks it supervises; rules and regulation, nice thing, right?
The agency takes supervisory actions against banks that do not comply; something that the state agencies are not doing. The OCC is nationwide staff of bank examiners conduct onsite and offsite reviews of banks and provide sustained supervision in these institutions’ operations. Examiners analyze asset quality, capital adequacy, earnings, liquidity, sensitivity market risk for all banks. Doesn’t that sound great? Now of course you’d have to expand the charter of the OCC to crypto exchanges. You would need crypto exchanges to basically get federal charters; get away from the state model, which I think has way too many holes. The Swiss cheese model doesn’t work. The states don’t have enough oversight, clearly. So, having a federal mandate, a federal charter, just like a bank, I believe is the solution to making cryptocurrency centralized exchanges safer.
Now, I would do this for dets, decentralized exchanges, and centralized exchanges. I don’t think there should be a difference. A decentralized exchange is essentially an exchange that allows two parties through smart contracts to exchange coins or buy and sell coins without a middleman, without a Coinbase or Binance or Kraken, right? Two parties interacting without a middleman through a pool of liquidity investors. Sounds great on paper. The problem is there’s still tons of hacking, tons of fraud. It’s unregulated. There is a greater chance of security risk of criminals, terrorism, things like that, that, at the end of the day, the government is just not going to accept. So, we need to all, I think, realize that the FTX debacle changed the way that we’re all going to have to look at cryptocurrency, including the government agencies. Now, we can get on board or we’re going to have to jump off and the cryptocurrency market will sink.
So, we need to embrace regulation. We should all want regulation, right? If you believe in cryptocurrency, regulation’s good. It makes things safer, more secure. You’ll get more mass adoption, which will increase the value of all the coins that we care about and actually bring the technology to the marketplace. Right now the technology is in a closet. Most people don’t have any use for cryptocurrency. Why? They don’t trust it, it’s too complicated and it’s unsecured. $3 billion of hacks this year, okay? Unacceptable. We need to fix that. And the way to fix that, I think, is instead of focusing on Bitcoin and Ethereum regulatory oversight on coins, focus on the exchanges. Don’t worry about if a Bitcoin or Ethereum coin is a security or commodity. Who cares, okay?
Focus on the exchange. Make sure the exchanges are safe. Make sure they have rules and regs. Make sure there’s oversight, onsite audits. Make sure they have capital reserves, one-to-one reserves. Make sure they actually own the cryptos that they hold, things like that. That will make the cryptocurrency market more safe. Who cares if Bitcoin is a security or not? It doesn’t make a difference, right? The FCC just wants oversight. Same with the CFTC and they’re fighting it. It’s not going to help us. It wouldn’t have solved FTX, okay? If Ethereum was a security or XRP is a security or not. Who cares, right? Focus on the exchanges. Make them safe, make them secure. Give the consumers the same comfort they have when they put a dollar in the bank, knowing that that dollar is going to be there when they want to pull it out. And that, Mr. JP Morgan, is not stealing all the money.
That’s how you solve the issues. $3 billion of hacks, okay? That happened on the exchange level, whether it’s a decentralized exchange, defi or centralized exchange. Worrying about coin, ICOs and coin manipulation, coin fraud, those are small issues. The SEC can get into those. Just like stock manipulation, stock fraud occurs, and it’s occurred for the last 100 years and it will occur for the next 100 years. The SEC reacts; solves that issue. Great. It’s not going to make cryptocurrency safer and it’s not going to stop $3 billion in hacks. If we want to stop that, we need to regulate the exchanges. And I believe the OCC is the best body to do that. Not the FCC, not the CFTC. Either you create a federal OCC, kind of a federal body that governs the exchanges, and I think the OCC is a perfect body because they already have the expertise. They have the reach. They are nationwide. Make these crypto exchanges sign a federal, or apply for federal mandate. They can also apply to the states, but I don’t think you need that. Have a federal mandate, get a federal organization that regulates the crypto exchanges, not states, because each state is worried about their state.
The consumers in New York, the financial division that issues the Bit license for crypto exchanges in New York, they’re worried about their New York customers; they’re not necessarily focusing on oversight and quality of these exchanges. They should be, but they’re just not, not cause they don’t want to; they have a lot of other roles and responsibilities that they have to satisfy, not just auditing and oversight of these exchanges.
So, if we want to prevent the next FTX from happening to US exchange, I believe we need to embrace more of a federal model, have the OCC or an equivalent federal agency, could be self-funded through audit costs, that handles the oversight and the rules and regulations needed to make these exchanges safer. Hacks happen; we need to stop this. We need to make sure that there’s better insurance, there’s better oversight, so the average consumer, you and me, we all feel safe buying Bitcoin or Ethereum on an exchange, leaving it there; no need to pull it off the exchange, just like we shouldn’t need to pull our securities off an exchange and hold paper stock certificates because we trust federal oversight of the equity markets just like we keep cash in the bank, right? I don’t keep my cash in my safe in my home or under my mattress or under a big hole in my backyard. No, I keep in the bank. We trust the banks. Well, we need to trust the crypto exchanges, and right now we can’t.
So, if we want to save cryptocurrency, if we want to save the future and embrace mass adoption of cryptocurrency; not necessarily as a second currency, but as a way to foster a new technology, whether it’s through smart contracts, blockchain Web 3.0; whatever the future holds, people need to feel comfortable buying and selling these cryptocurrencies, and they’ll need to do it on exchange, right? And in order to have that and make it comfortable and safe for the American consumer, we need a federal oversight agency that has the knowledge, the expertise, the capacity, the budget to audit these exchanges ongoing on a year-to-year basis, enforce better federally-mandated rules and regulations and make sure these exchanges are safe for the consumer, for the investor, for everyone.
So, that’s my solution is focus more on the exchanges, both defi and centralized, less on the actual coins because there’s a lot less fraud on coin manipulation, those types of activities, than actual hacking that occurs at the exchange level that wipes out, as we saw, billions and billions of dollars and losses to average consumers, okay? And that is the heart of the matter and that’s what we have to address. Focusing on whether Bitcoin or Ethereum or XRP is a security or not is maybe winning a battle but losing the war; it’s not going to help anything. Because investors, whether it’s the security or not, the FCC, the CFTC, whatever, they’ll get involved and focus on that coin, but it still doesn’t solve the issue if the cryptocurrency exchanges centralized and defi are unsafe and don’t have proper rules and regs. Who cares if it’s overseen by the SEC of the CFTC? We’re still losing our money because these exchanges are getting hacked or they’re not actually holding the coins because there’s no oversight and there’s one bad actor that could erase all the good of the company or the cryptocurrency ecosystem.
So, that’s my solution. Let’s focus on a federal mandate for regulating the exchanges. Focus less on the actual coins, more on the exchanges, make them more safe, more secure, and give the American consumer more satisfaction and comfort that these exchanges and the coins they hold on them are actually there and are available when they want to withdraw them and they’re less susceptible to social engineering and hacks, which has caused $3 billion in losses this year, which is unacceptable, okay? So, that’s my thought. I don’t obviously drive policy. I’m not sure that I’m going to have any bit of influence, but if someone’s watching this or listening to this and has some connection to anyone in government, I have some connections to members of Congress, various states, Senate Finance committees and the Ways and Means and some of the Senate Finance Committee for retirement accounts; I’ve talked to them about this, but they’re basically are like, hey, cryptos is not my area, it’s not my focus. That’s someone else’s department.
The issue is all these agencies are fighting for power; more power, more money, more money, more power, it’s circular. So, I’m not sure they’re going to be willing to just be like, hey, let’s just give it to a federal organization like the OCC that’s not controlled by Congress or government, or let’s create a new federal agency that will have a federal mandate, federal charter for cryptocurrency exchanges, just like banks, which I believe is the answer and hopefully it gets implemented. My only goal is to make cryptocurrency safe and secure for investors. Yeah, it’s volatile. It goes up or down. And obviously, I’m not giving any advice to go buy cryptos but if we want to see the future of cryptocurrency and the impact it can make on our lives, the financial systems, making financial transactions more transparent, less costly, then it needs to be safe and secure so there’ll be mass adoption and we all trust it because if we don’t trust it, there’s no system, just like the banks. If we lose trust in the banks, the US financial system collapses and we don’t lose trust in the banks because the Office of Comptroller and Currency does a great job, great, great job making sure these banks have adequate capital. There are rules and procedures and regulations. There’s liquidity, they’re well run, and they do that by onsite and offsite audits to make sure these banks are properly run and the cryptocurrency industry needs that, especially centralized and decentralized exchanges.
So, that’s my two cents. Hope you guys enjoyed today’s podcast, video, something different. Feel free to leave a comment, good or bad. Hopefully you liked it, so give me a like. If you have comments or questions, put them in the chat if you’re watching on YouTube. I do my best to get back and respond to every question or comment, so feel free and really appreciate all the support. Next week, I’ll get back to more self-directed retirement, tax planning topics, but I wanted to do something fun. I got pushed by some of my friends to do this because I’m super passionate about cryptocurrencies, the future, I really believe in it but the FTX, the Luna, the Terra, the three arrows, all this stuff. The social engineering hacking has really tainted my appetite and it’s taken a lot of time to, inherently I’ve been fighting this, these two feelings like, is this legit? Is this worth it? And I do believe the technology is worth it. I do believe something amazing will come out of this. Cryptocurrency is not going away, but it will go away if we don’t fix this. The FTX, debacle showed what could happen to an exchange that runs without any oversight, and thankfully, the US is not Bahamas or Singapore or Hong Kong. There is good oversight, but it’s not strong enough. There’s $3 billion of hacking that’s going on. We need to stop that. People have lost faith in cryptocurrency and we need to rebuild it and the way to rebuild it is through regulation and I believe through federal, not state regulation. And I believe that’s the answer.
So, thanks for spending some time. I hope you have an amazing Thanksgiving holiday and take care. Talk to everyone again next week.