December 1st, 2022 | ALLAN RAY

How Libertarianism Failed Crypto

A lack of regulation allowed FTX to misappropriate billions and to fleece investors.

The unregulated world of crypto exchanges didn't work out so good for millions of investors who put their trust in FTX. Millions of Americans and people from around the world lost millions to the failed crypto exchange because it was allowed to lend out and misappropriate billions worth of other people's money with very little oversight. This is where Canada leads by example and how a case for more regulation in the global crypto community can be built.

The libertarian argument that the free market will sort out the corruption probably isn't one that clients of FTX would want to hear right now. The Ayn-Randian notion that bad companies will sink and good companies will swim in an unregulated marketplace controlled by savvy consumers and competitors surely won't sit well with those who lost their life savings to a couple of corrupt Millennial billionaires. It may be true that fate eventually caught up to FTX, Sam Bankman-Fried and Gary Wang, but at what cost?

Leading up to the FTX debacle, the summer crypto crash forced similar exchanges to freeze withdrawals to prevent something akin to a bank run. This left investors unable to access their cryptocurrencies and investments, as several exchanges froze their accounts to remain liquid. As Bitcoin and Ethereum collapsed, many investors began pulling out their investments and selling their cryptocurrencies, which is when exchanges like Hodlnaut realized they had a problem. Similar to a fractional reserve banking system, in which banks lend out deposits and investments, most of the money inside these exchanges was gone and put into other collapsing cryptocurrency investments.

Much of what Bankman-Fried did was illegal, unethical and inappropriate. However, the lack of oversight due to non-existent regulations on cryptocurrencies and exchanges made it too easy for him to misappropriate people's investments. Once he was caught, the walls began to close in, but for the investors who lost millions, it was too late. The free market caught up to FTX and those involved, but only after the damage was done. Now, it is likely the investors won't ever see their money again.

In Canada, where we like to complain about over-regulation, most of our federally regulated crypto exchanges are stable and safe, making it close to impossible for exchanges to spend and misappropriate people's investments how FTX did. For the exchanges and their founders, this limits their capabilities to profit, but it protects their investors. It also protects the value of their investments and the cryptocurrencies.

Following the FTX debacle, Bitcoin and Ethereum crashed as investors pulled their assets and as speculation grew about the misappropriation of billions worth of investments. The ripple effects of the debacle were felt by everyone, across the world, who had investments in crypto. Although they didn't lose their money in FTX, millions of investors watched more of their crypto profits get wiped out in what had all ready been a bad year. Canadian crypto exchanges had few of the same problems and Canadian investors remained protected from the same kinds of unethical, corrupt and dubious dealings, despite having their investments damaged by the rippling effects of the FTX debacle.

Registered exchanges in Canada are required to follow guidelines and laws that protect people's investments, one of which includes the requirement to keep investments in a trust and to maintain regular reporting. As stated in a recent email from Wealthsimple, “Some crypto platforms (like Wealthsimple) are registered with Canadian securities regulators and are legally obligated to uphold certain standards around security, insurance, custody and more. Most importantly, they are not permitted to lend out your crypto or otherwise use it in their businesses. And it’s held in trust – in the event of a business failure, your crypto is still your crypto.”

Even though there are rules and regulations for registered exchanges in Canada, there is not always a requirement to register. Some exchanges may not be registered or subjected to the same oversight, for various reasons. Many international exchanges do not fall under Canadian jurisdiction, but are open for Canadians to use.

At the moment, there are ten regulated exchanges and crypto platforms in Canada:

Wealthsimple

Netcoins

Newton

Coinsmart

VirgoCX

Coinsquare

Coinberry

Bitvo

Bitbuy

Fidelity Digital Assets

If you have your crypto investments on a platform that is not on this list, you would be wise to withdraw them and put them with one of the platforms or companies mentioned above. It is best to do your research and to find out which platform best suits your needs and trading habits. For long term crypto investments, Wealthsimple is ideal, but for frequent trades and quick profit, platforms like Newton and Netcoins may be a better choice.

For the sake of safety, it is best to avoid popular American and global exchanges like Coinbase, Binance and Kraken.

If the world were to take more active measures in regulating crypto exchanges in the same way Canada does, large crypto crashes and volatility due to misappropriation and corruption could be avoided. Massive debacles and their ripple effects could be minimized on a global scale and more investments could be protected with stronger regulations and laws. As much as we detest over-regulation, we shouldn't fall subject to the ideological thinking that causes under-regulation and the same conditions that allowed FTX to fleece millions of unwitting investors.