Bitfinex is being accused of misappropriating $850 million worth of clients’ assets collected through USDT. Unlike banks, which would typically cooperate with the government after being charged, the company fought back. Moreover, it released the most definite statement possible and described the US government was acting like the mafia. It even threatened the crypto community that if it were taken down by the government, the price of Bitcoin would go up to $1,000. Bitfinex has not been recognised as an exchange company with a good reputation since the day it was established. It spread its losses to its clients after being hacked and covered up its relationship with Tether, until the Paradise Papers revealed the connection between the two.
Assuming a company is always taking action in its best interest, it means fighting back the US government is the best option on the table. This can imply three things:
- Bitfinex is strong enough to fight against the US government.
- There is no other option; the accusation is true, and they have no way to fix it.
- Bitfinex wants to voice out of the crypto community, and they dare putting their profit at risk.
While the first and third options are highly unlikely to be accurate, the second option is the most likely one. Most of the exchange companies have been infamous for several things for a long time: price manipulation, embezzlement of funds, insider trading, money laundering, etc. If the regulatory bodies are taking them down, they have more than enough legitimate reasons. Criminality is not something the society can tolerate, even in an emerging industry.
The adoption of USDT is one of the most surprising phenomena in the crypto scene. If you ask any crypto trader if he or she believes USDT has sufficient US dollars backing its token, you will get the answer ‘no’ 99% of the time. Yet USDT is the most widely adopted stable coin till today. This is quite ironic when we consider blockchain as the trustless technology that doesn’t rely on authorities and cannot be controlled by governments. Nevertheless, USDT, an untrustworthy token contributed almost 26.7% (according to CoinMarketCap on April 24, 2019) of the total market volume (and the most expected news is probably the birth-regulated version of Bitcoin, Bitcoin ETF).
Based on the abovementioned facts, it is very logical for the government to critically examine USDT. Tether has even refused to undergo audits or disclose its banking relationships. Instead, it just put a proof of funds issued by a law firm on June 1, 2018 (https://tether.to/wp-content/uploads/2018/06/FSS1JUN18-Account-Snapshot-Statement-final-15JUN18.pdf). This is the first step of the government’s approach of using regulations. Instead of regulating every cryptocurrency available on the market, the government tries to regulate the fiat channels. USDT and other stable coins that exchange with fiat trading pairs would eventually have no option but to work with the government to survive. The way USDT company reacted shows it has no better way to work with proper regulation; hence, USDT will fail for sure—unlike Bitcoin, which is gradually becoming a standalone, decentralised digital currency. USDT is nothing similar to Bitcoin or many other cryptocurrencies, except its records are maintained on blockchains (see my previous article; blockchains don’t achieve data authenticity); The USDT company is printing US dollars and hoping the US government would leave them alone.
The regulation is going to be tightened for exchanges and then miners. This is good news for investors, but not for crypto enthusiasts. Bitcoin ETF and other cryptos cannot be traded on the mainstream exchange platforms unless the government can make sure they can control the flow of money. This control is crucial for the modern financial system; for example, when there is a court order to freeze someone’s asset, all the shares and bank accounts should be frozen. This is, however, not the case for cryptocurrencies. The government cannot restrict you from transferring your Bitcoin to overseas parties; it can’t even know if you are holding any Bitcoin. Hence, the only way to achieve such control over Bitcoin, Ethereum and other cryptocurrencies is by controlling the fiat channels (i.e., the exchange and stable coin). That’s why this action represents a good signal for crypto holders of major cryptocurrencies like Bitcoin, Litecoin and Bitcoin Cash (maybe). For Bitcoin ETF and other crypto products, this is a step closer to becoming available to the general public.
Crypto exchanges will be next!
As I mentioned in the previous section, there is no way for the government to control the flow of Bitcoin and most of the decentralised cryptocurrencies. What it can do is tighten the regulation on every cryptocurrency to fiat channels, and the exchange will be the next. This is especially needed when several criminal activities happen on crypto exchanges every day—from reporting fake volumes to mislead investors to using illegal collective investment schemes (some IEOs). It can work outside the law for longer if they have no fiat channel. Otherwise, they will all be subject to regulation very soon.
Miners come after
After regulating the exchange; mining will be the next thing to be regulated. It is not hard to imagine that you will need to get a licence to be a miner. I will spend more time discussing the possible regulations of cryptocurrencies in the next article.
Decentralisation is a cost we pay to allow public blockchains to operate without trusted parties. Censorship-resistant is the most valuable feature of cryptocurrencies together with some unpleasant side effects. If the side effects are not acceptable, what we need to do is to consider other alternatives other than regulating the technology which is designed to be working without regulation. Why pay this cost and make a system slower, more expensive and less stable if we are not trying to make it uncontrollable?