Crypto: In Regulation We Trust

The crash of the digital asset markets, accelerated by the failure of two multi-billion-dollar DeFi initiatives, has once again left users questioning whether crypto can be trusted.

The short answer is Yes: there are plenty of trusted and trustworthy actors and platforms. In fact, trusted platforms provide the gateway to crypto for millions of users, and are likely to continue to do so for the foreseeable future.The question of which services to trust is also easy to answer. It is the regulated, compliant platforms that have proven robust when users are seeking safety.

Lessons From The Past

Back in 2014, the collapse of MtGox – the first and largest bitcoin exchange, at one point responsible for around 90% of total BTC trading volumes – plunged the sector into a deep bear market. ‘Not your keys, not your coins’ was the refrain and the lesson from that debacle: if you trust your crypto to a third party, you give up control of it and lose one of its strongest advantages over TradFi.

Eight years later, two projects showcase the failure of trust in the crypto sector: Terra, and Celsius. Both are – or were – unregulated products that made huge promises. Both appear to have failed, taking billions of dollars of customer money with them.

TerraUSD (UST) was an algorithmic stablecoin, built on the Terra (LUNA) blockchain. UST was supposedly pegged to the US Dollar and offered high rates of return, but when confidence faltered, so did UST’s peg, and the whole $60 billion house of cards fell practically overnight. 

The second project was Celsius, a crypto lending platform that also offered users outsized returns for depositing crypto. In June, ‘extreme market conditions’ prompted Celsius to prevent customer withdrawals so that it had the collateral to avoid being wiped out on a series of bad trades. The company is now said to be looking at bankruptcy.

Both of these episodes have drawn attention from regulators. Both represent some of the worst excesses in the crypto sector. Fortunately, they are not indicative of the whole.

Trusted Crypto Organisations

Outside of the limelight, there are the case studies that show, behind the scenes, that trust in crypto has a strong foundation on which to build.

Let’s take two counterpoints to Celsius and Terra – both unregulated crypto projects that have played fast and loose with users’ money, albeit in different ways. Coinbase is, like Celsius, an enormously popular custodial platform – the difference being that, as a US-based and NASDAQ-listed company, it is one of the most heavily regulated organisations in the space. Then there are the fiat-backed stablecoins that have received renewed attention in the wake of Terra’s collapse – and which have fared differently, according to their regulatory status.

Coinbase

Coinbase has become synonymous with crypto for millions of people. Its popularity has soared over the past two years, and the platform continues to grow despite the bear market.

Founded in June 2012, Coinbase acquired over 60,000 verified users in its first nine months, and grew to a million in the following year. As of 13 May, 2022, the exchange had almost 90 million registered and verified users, and a quarterly trading volume of a third of a trillion dollars. In total, over 11 percent of all crypto trading takes place on Coinbase. The platform is a by-word for trust for tens of millions of users. 

Despite scaling back hiring during the bear market, Coinbase continues to blaze the trail, expanding the number of coins and tokens they offer. They are in the process of listing dozens more, increasing transparency by trailing possible additions to the crypto community and scheduling when listing will take place. Projects and the tokens/coins recently added to Coinbase, or next in line, are as diverse as:

• Boba Network (BOBA), an L2 scaling solution for Ethereum that offers low fees, fast bridging for fungible and non-fungible tokens, and supports hybrid AWS computing for smart contracts.
• LockTrip (LOC), a blockchain-based travel booking platform that reduces prices by cutting out middlemen.
• Chrono.Tech (TIME), an ecosystem of HR-related software including the LaborX crypto job platform, TimeX exchange, and crypto payroll solution PaymentX.
• Parsiq (PRQ), a platform for monitoring blockchain-based events and connecting them to off-chain dApps.

Mines of Dalarnia (DAR), a blockchain-based fantasy game.

While it is a centralised and custodial platform, then, Coinbase is a trusted entry-point to the decentralised economy and a significant proportion of its assets for a large and fast-growing percentage of the crypto sector. As unregulated exchanges are forced to shutter, there’s a good chance Coinbase will end up taking an even greater market share.

Stablecoins

The second counterpoint to UST is provided by the fiat-backed stablecoin sector. As confidence in UST evaporated, traders rushed to pour money into stablecoins they could trust. There were three main options: USDT, USDC, and BUSD.

USDC, which is run by a US-based organisation, is seen as a more compliant analog to the unregulated USDT. When UST crashed, fear spread to USDT, which has not always enjoyed the best track record in terms of transparency. For a time, USDT was trading as much as $0.05 below its peg, while USDC was above its peg – indicating that funds were flowing out of USDT into the apparent safety of USDC.

BUSD, Binance’s native stablecoin, is one of the few fully-regulated stablecoins in the sector. It is the white-labelled version of USDP, and is strictly regulated by the New York State Department of Financial Services. The effect of this regulation is to ensure that all funds backing USDP and BUSD are either cash, or highly convertible to cash, so that customers will always be able to redeem on BUSD for $1 at all times. USDT, and even USDC to some extent, back their tokens with other assets that are less liquid, meaning that in the event of a run, some holders may struggle to redeem their tokens quickly at their full value.

Pax Dollar (USDP) itself has a market cap of just under $1 billion. BUSD, its counterpart, has a $17 billion cap. Like USDC, BUSD saw a significant spike in volume on 12 May as Terra completed its crash to zero.

In short, as one stablecoin based on financial alchemy imploded, money sought the safety of more reliable, fiat-backed ones – with the regulated products clearly coming out on top. The unregulated USDT stablecoin has continued to lose market share since the Terra debacle, down from a market cap of $84 billion to $64 billion in six weeks.

Additional regulation is undoubtedly coming, with the aim of ensuring something like Terra does not happen to the stablecoin sector again. This will further undermine confidence in unregulated stablecoins, which have already proven to be a poor store of value when they are needed the most. It might come as no surprise that on 1 June Coinbase announced its plan to list Gemini Dollar (GUSD), the only other US-regulated stablecoin, despite the fact that it belongs to a direct competitor. 

For all that the crypto sector was built on decentralisation and began life outside of the mainstream financial sector, it’s regulated organisations that are thriving in the current downturn, and that will survive to lead the sector out of the bear market.