We need regulation to protect users of crypto

The past week filled us with undue consternation, but due concern. This was after regulators in the United States issued their first ever joint warning to banks over the risks associated with the cryptocurrency market.

Understandably, the financial watchdogs told financial institutions to be watchful of potential fraud, legal uncertainty and misleading disclosures by digital asset firms when dealing in cryptocurrency.

Again, banks were warned on the possible “contagion risk” from the cryptocurrency markets, two months after the collapse of trading platform FTX sent shockwaves through the crypto industry. 

FTX Trading Ltd, commonly known as FTX, is a bankrupt company that formerly operated a cryptocurrency exchange and crypto hedge fund.

The exchange was founded in 2019 and, at its peak in July 2021, had more than one million users. It was also the third-largest cryptocurrency exchange by volume.

This news, as expected, caused much consternation as it made it seem that cryptocurrency markets were unsafe, unreliable and, worst of all, unsuited to sound business practices.

But according to the International Monitory Fund (IMF), crypto assets have in the past few years moved from being niche products in search of a purpose to having a more mainstream presence as speculative investments, hedges against weak currencies, and potential payment instruments.

In Africa, adoption of digital assets is moving faster than the rest of the world, despite the continent having the smallest crypto economy in terms of market penetration.

According to the US blockchain analysis firm Chainalysis, this could be informed by the fact that Africans are looking for alternatives to weak financial infrastructure. 

The firm says remittances, peer-to-peer payments and savings, have emerged as major adoption drivers for people on the continent.

So it is a fact that the fall of FTX is a blow for the crypto industry and sets us back many years of hard work and innovation. But this is where good regulation should come in to protect the innovation, and most importantly, the users.

In June 2021, Bank of Uganda (BoU) launched a regulatory sandbox framework allowing for financial technology (fintech) companies to test innovative financial solutions in a controlled environment, a space in which we happen to be participating in as Digital Money Exchange, alongside other members of the Blockchain Association of Uganda.

Of course, pains such as the one occasioned by the collapse of FTX are to be expected in a cryptocurrency market which is very much still in its infancy. 

Former FTX chief executive Sam Bankman-Fried was accused by the US authorities of building “a house of cards on a foundation of deception, while telling investors that it was one of the safest buildings in crypto”.

The 30-year-old former billionaire admitted failings but put the problems down to his own “mistakes”, not the cryptocurrency market.

The FTX fall should not overshadow the potential of digital assets, namely transactional freedom, security, and ease of transaction.

Many cryptos, as they are also called, are designed to have unique advantages over fiat currencies or the traditional banking system, even if they don’t have widespread use or adoption yet.

Apart from increased transactional speeds and reduced costs, cryptos democratise accessibility. Anyone can use cryptocurrency. 

All you need is a computer or smartphone and an internet connection.

Finally, there is transparency in all cryptocurrency transactions as they take place on the publicly distributed blockchain ledger. 

Thus, anyone can look up transaction data, including where, when, and how much of a cryptocurrency someone sent from a wallet address.

Therefore, good regulation will go a long way in safeguarding both the users and this innovation that has immense potential.

Mr Martin Orena, is the CEO of DM Exchange, a Fintech company.

Twitter: @martinorena