Regulators Ignored Warnings of Fraud in the Cryptocurrency Industry
The CEO of Kraken, and the CEO and founder of Custodia Bank, have voiced their frustration with regulators in the cryptocurrency industry.
Long says that she provided law enforcement with evidence of probable crimes committed by a large cryptocurrency scam months before the company imploded, leaving millions of customers with losses.
Powell has had a similar experience and is frustrated that regulators ignored the “massive red flags and obviously illegal activity” he has been pointing out for years.
I can't tell you how infuriating it is to have pointed out massive red flags and obviously illegal activity to regulators only to have them ignore the issues for years. "They're offshore. It's complicated. We're looking at everybody." FOR YEARS. Then to be used as their example. https://t.co/YHdNazM2UE
— Jesse Powell (@jespow) February 18, 2023
Both Powell and Long expressed their discontent that their firms are being used as an example of fraud when they have tried to do the right thing all along.
The challenge with banking regulators
Long warned banking regulators of the potential risks of bank runs at banks servicing the cryptocurrency industry before the actual bank runs occurred. However, she believes that her warnings were buried in the bowels of bureaucracy, and the regulators ignored her concerns.
The Federal Reserve Board recently denied Custodia Bank’s application to become a member of the Federal Reserve System.
Comparison to the mutual funds market
Long said that the cryptocurrency market is comparable to the mutual funds market. In the 1930s, it was filled with bad actors and fraud.
However, instead of thwarting the market altogether, President Franklin D. Roosevelt developed breakthrough rules that helped weed out the fraud without killing the potential of mutual funds. Long believes that the US needs to do the same with cryptocurrency.
A regulatory approach for the cryptocurrency industry
Long suggests that the US needs to sit down with credible people in the cryptocurrency industry to develop a regulatory approach that does not thwart the innovative potential of the industry.
She believes the Washington crackdown on cryptocurrencies will only push risks into the shadows, leaving regulators to play whack-a-mole as threats appear in unexpected places. The SEC’s “regulation by enforcement” approach has been criticized. The industry requires a regulatory framework that balances innovation and consumer protection.