Amidst the most recent crypto cataclysm, hopeful narratives have emerged suggesting that the U.S. government and other jurisdictions could have prevented the implosion of offshore firms such as FTX.
The argument offers two similar threads related to regulatory guardrails:
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- Stay in the U.S. instead of leave: Better crypto-specific regulation in the United States would have encouraged companies to stay local and therefore discouraged unregulated development elsewhere to “infect” unsuspecting U.S. consumers.
- Grow in the U.S. instead of nothing: Clear regulation in the U.S. presumably grows the crypto industry by inspiring entrepreneurship in the United States. Lack of clarity does not promote risk-taking for which U.S. entrepreneurship is known.
FTX’s international unit presumably would not be experiencing bankruptcy today if it was required to adhere to current United States banking laws let alone anything crypto-specific that may bubble up someday. Of course, a CFO might have helped, too.
It’s fair to ask, would FTX’s founders ever founded anything in the U.S.? Were they only interested in exploiting unregulated environments? Maybe so. And so… does that need to be “onshored”? Doesn’t seem like it.
The European Union (EU) is thinking about how to take a crack at regulating offshore entities but is still far from pulling the trigger. The European Securities and Markets Authority (ESMA) will be on the hook in the EU once Markets in Crypto-Assets (MiCA) regulation takes effect in 2024 or thereafter.
European Commission head of digital finance, Jan Ceyssens, suggested at an event in London last month that MiCA will address “reverse solicitation” where a crypto entity (such as “FTX”) which does not have the proper registrations in the EU is prohibited from accepting business with European Union citizens. Moreover, if an EU citizen is able to deposit money in a non-registered offshore exchange, the exchange is culpable. Read more on The Block.
In this scenario, the laws of the EU extend anywhere just as the tentacles of today’s EU General Data Protection Regulation (GDPR) regulation for online privacy have steadily reached around the world as European audience accesses websites globally.
On top of this, there are the crosscurrents of Anti-Money Laundering and Know-Your-Customer (AML/KYC) requirements which the financial system depends on to root out bad actors who are sending and receiving funds.
The onshore-offshore debate gets to the heart of evolving crypto regulation and another parallel thread:
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- National regulation – There is a steady web of crypto regulations growing among sovereign nations and across regions (like the EU), which builds on national financial systems.
- Global regulation – At the same time, there is a steady growth of global regulations that enable the functioning of the global economy while also providing a degree of security and surveillance. If a country wants access to the SWIFT network, they will need to abide by its associated laws and requirements, for example.
Primacy
As these purposes intertwine, enter the challenge for U.S. lawmakers: the primacy of the U.S. dollar and its importance to American power.
Assuming crypto and blockchain technology can make a use case for better settlement of payments internationally, how to continue to maintain the primacy of the U.S. dollar?
Put another way, offshore or onshore, it will all be the same shore. How to keep the Dollar as the world’s reserve currency?
As crypto and blockchain technology continues to evolve and grow, the Dollar’s “dominance strategy” will be something Congress, regulatory bodies and the U.S. Treasury will need to discover especially as emerging economies such as those in Africa and underserved communities in the U.S. embrace the less restrictive environment of crypto.
Money = Power