The crypto tide is going out and uncovering those who have been swimming without bathing suits!
As I write this blog, TerraUSD founder Do Kwon, who has already been subpoenaed by the SEC, is being examined under a microscope by many government authorities in the midst of the spectacular meltdown of his stable coin. At the same time, BitMex founder Arthur Hayes awaits sentencing. In 2021, Mr. Hayes was arrested on two felony counts. He had long been considered a cryptocurrency advocate; he reminds you that your computer screen can only protect you for so long.
The myth of a crypto world free of government intervention is dying hard… and quickly.
The world of cryptocurrency was initially filled with new possibilities and unlimited potential. However, this excitement seemed to ignore one stark reality: the international financial world has long-established and heavily enforced rules and regulations. Since its inception, many founders involved in cryptocurrency have believed that many traditional “rules” did not apply to them. This may be because their dealings have an air of anonymity; and of course they take place on platforms not under direct government authority.
As a result, many involved in developing the crypto universe failed to realize the deep-reaching impact of these regulations. Once it dawned on them that governments would definitely have a say, many were too slow to realize how quickly that regulation would become part of their world. In short, the dream of an unregulated crypto-universe utopia inevitably ran into the brick wall of real-world government regulation.
Have Crypto Founders played regulatory catch up fast enough?
Despite crypto-executives believing “the tide is turning” for government regulations in their favour, they are still being extremely naive. Countries that have not banned cryptocurrency altogether are racing to enact legislation. They focus on sanction busting, consumer fraud, money laundering, liquidity rules and tax evasion prevention. It seems clear that the race is on between becoming compliant or feeling the wrath of authorities.
For example, CEO of Binance, Changpeng Zhao (better known as CZ) has come under fire in recent months. There are allegations of neglecting precautions to prevent sanctions busting and money laundering. These allegations have inspired an attempt to make systemic changes in Binance. CZ recently spoke about Binance’s plans to convert to a more traditional company model, striving to obtain licenses and meet legal standards. Along with non-traditional jurisdictions like Dubai, Binance is also courting G7 countries like France. However, Binance is also under a microscope due to this stablecoin crisis.
Also under scrutiny is FTX founder Sam Bankman-Fried. While he has become somewhat of a media darling with his high-profile philanthropy, he seems to have shocked many in a recent interview. He appeared to clearly describe Yield Farming as a Ponzi scheme. Already online crypto investigators have pounced on this inadvertent revelation and FTX’s role in this space. Will his recent focus on moving FTX’s headquarters from Hong Kong to the Bahamas and applying for US registration be sufficient to weather the storm?
The stablecoin collapse and the uncovering of rampant NFT fraud have shone the regulatory klieg lights on many industry founders. Whether their businesses survive and they avoid being Arthur Hayes’ cellmate will depend on whether they have successfully accelerated their regulatory compliance and protected their wealth and persons through an effective Backup Plan.
Any lessons for the greater Crypto community?
The key lesson for the greater crypto community is that regulators…especially tax authorities… are intensely focusing on the crypto world. They are well aware of significant non-compliance. Last year, I highlighted the need for crypto enthusiasts to get their affairs in order in an article entitled: “Mo Money Mo Problems: Backup Planning for Bitcoin Bros“. Soon after, various unqualified salespeople started flogging everything from NFTs in faraway places to second citizenships and residences.
Over the past year, there has been no lack of promoters in the crypto sphere promoting alternative residences and citizenships as a means for crypto enthusiasts to meet their combined goals of reduced tax burden while living an enjoyable lifestyle within a community of likeminded people. The problem is that these promoters are focused on selling a product that pays them a significant commission. The significant tax issues of how the unsuspecting buyer gets from where they are now to where they want to be without financially crippling themselves do not enter into these aggressive sales pitches.
Listening to these promoters is like talking to a brick salesperson at a hardware store. Logically, the initial step in building a new life should be to work with a qualified and experienced architect…not selecting the color of brick! In my next blog, I will outline a step-by-step roadmap for members of the crypto community to follow to avoid getting caught up in the coming hurricane of government enforcement.
Crypto Backup Plans: what lessons can we take away?
In summary, the vital lessons to be learned from the current crisis are:
- not to ignore the growing government interest in regulating crypto; and
- not to fail in getting expert advice free of any possible conflict of interest.
Failing to heed these lessons would undoubtedly prove a recipe for disaster.