Cryptocurrencies are the digital zeitgeist. They represent a cultural moment where technological innovation meets financial intrigue – and everyone wants a piece. While the societal buzz tends to focus on those becoming wealthy from crypto, behind the scenes there are thousands of crypto victims. Countless hacks, extortion schemes, and market manipulation tactics should have shed the perception that crypto is a harmless game to make money, yet its popularity and adoption has only grown over the years.
Unregulated market forces have made crypto into the Wild West where anything goes and, ostensibly, anyone can become rich. But if it sounds too good to be true, it probably is. Without sensible regulation, regular consumers will continue to be defrauded and have their funds hacked, not only risking personal financial ruin but triggering downstream instability to wider financial markets.
Last month the crypto platform PolyNetwork temporarily lost $600 million of its customers assets to hackers. This was only a hack of moderate severity as far as infamous thefts go. In 2019 alone, hackers stole more than $4 billion by breaching crypto exchanges and digital wallets. In the crypto world, there are no specific rules to ensure protection of customer assets. Unlike banks, crypto exchanges don’t have any specific cyber security requirements, making hacks common and relatively easy for sophisticated cyber criminals utilizing techniques like SIM card swapping, phishing, and URL hijacking.
In addition, crypto exchanges are not required to have systems to prevent fraud and manipulation, nor are there rules to prevent or minimize conflicts of interest. One analysis identified 175 “pump and dump” schemes where crypto traders drastically inflated and then suddenly crashed the prices of 121 cryptocurrencies in 2018, generating millions in losses for unknowing consumers.
Another analysis found widespread use of automated trading programs or “bots” to manipulate prices. The bots used strategies similar to a practice outlawed in stock and future markets called “spoofing” where traders create fake orders only to cancel them – an attempt to trick consumers into buying or selling crypto based on false market signals.
As of September 2021, the total market value of all the crypto assets surpassed $2 trillion. While it’s a small part of the $400+ trillion financial system, it is not an isolated one. There are growing linkages to the wider financial system through banks, brokers, and technology vendors that interface with crypto exchanges – including large players like Fidelity, Goldman Sachs and Wells Fargo.
This will only grow as the consumer demand for crypto shows no sign of abating. If left unaddressed, the cybersecurity and market manipulation vulnerabilities in the cryptocurrency market could cause collateral damage in the global financial system.
Proponents of cryptocurrency will argue that cryptocurrency regulations would slow down the advancement of the technology or could raise barriers for investor access and capital formation. While this may be true initially, addressing the vulnerabilities present in the cryptocurrency market would boost investor confidence and technology investment in the long term.
The fact that crypto exchanges lack basic cybersecurity protections or are victims of market manipulation from practices outlawed in the traditional financial market underscores how badly these entities lack strong operational, governance, and risk practices. These barriers will do more to prevent global adoption of cryptocurrencies than attempts to develop guardrails around them.
Ultimately, interest in cryptocurrency will only grow. And with it, theft and defrauding will also grow. The federal government has an imperative to create regulatory oversight of crypto-assets and the intermediaries that operate in that space given the risk to consumers and the larger financial market. If the U.S. continues to just let the invisible hand guide the crypto market, soon the trillions that consumers, banks, and trading firms have held in this market will also become invisible.