We know that banks are banks because of regulation
Before you hand money over to a bank you want to know that they are in fact a bank and not just a random person taking deposits– anyone can TAKE deposits:
With banks you have the FDIC, the Federal Reserve Board, and the Office of the Comptroller of Currency to provide licensing and oversight and ensure that you’re giving your money to a bank.
How do we know that cryptocurrency exchanges are valid cryptocurrency exchanges?
How do I know that when I give money to a website to buy/store crypto that they won't just take my money and disappear?
It looks like today the primary mechanism for determining whether or not a platform is valid is reputation and how long they’ve been in business. It’s not as comforting as an actual regulatory approval process but I’m comfortable with using the most popular exchange (aka Coinbase) given the following:
The internet and my IRL friends say they are okay to buy from (I think it’s unlikely that the blogosphere and my friends are all '“in on it” if there’s some sort of scam)
They’ve been in business for 9 years and the FTC hasn’t tried to take them down
I will be transferring my money out of Coinbase within a day of purchase so I don’t need to be as concerned about them being over-leveraged, failure, etc.
What happens if/when the regulatory environment dramatically shifts?
In a dynamic regulatory environment, how do you protect yourself against a the risk that your investment could one day be made illegal?
And how do you protect yourself against the risk that the government will make their own crypto that could make non-government crypto obsolete?
(I'm aware that there are significant environmental concerns for most coins– note that I'm lumping any sort of environmental blowback into regulatory risk and/or leapfrog risk, covered in my next post.)
Side note: BitcoinSV (a recent fork of Bitcoin) says that they are the "regulation friendly" coin because they do not provide anonymity to their users and aspire to comply with know-your-customer (KYC) and anti-money laundering (AML) rules. This fork also claims to be faster and more eco-friendly that the original Bitcoin. Interesting coin but, risks:
1) Will traditional crypto users be interested in a coin with reduced anonymity?
2) Does the government agree that this is a "regulation friendly" coin?
3) What if instead of blessing a "regulation friendly" coin the government just decides to make their own crypto?
However, if the Fed does provide a digital currency, it won't likely support anonymity, so the others may still be preferred by some. I think many crypto users will be less interested in a non-anonymous coin.
The Federal Reserve is indeed considering a digital currency backed by the dollar. I expect that this is inevitable.
https://www.federalreserve.gov/publications/files/money-and-payments-20220120.pdf