The Voyager Rebuff Highlights the Urgent Need for Regulatory Oversight

Key Insights:

• On Monday, beleaguered crypto firm Voyager rejected an FTX buy-out proposal, calling it “a low-ball bid.”
• In 2008, bank mergers in the wake of the Lehman collapse prevented a contagion of far greater magnitude.
• The crypto winter is wreaking havoc across the crypto market. How firms on the brink of bankruptcy can reject buy-out offers is not in the interest of investors.

On July 1, Voyager Digital announced the suspension of trading, deposits, withdrawals, and loyalty rewards. The company cited market turmoil as the reason, attributing the blame to the 3AC default.

The news followed a late June market response to reports of a possible 3AC loan default. TSX listed Voyager Digital (VOYG) tumbled by 52.5%. The June sell-off left VOYG down 97% for the current year.

Despite the VOYG share price slump and news of Voyager Digital suspending trading, deposits, withdrawals, and loyalty rewards, there was little evidence of regulatory intervention.

For investors and the crypto market, the lack of coordination among regulators to tackle the crisis should be alarming.

The lack of coordination also raises the question of where the resources of the SEC lie. Some may consider targeting crypto firms for allegedly selling securities illegally as secondary to tackling the fallout from the crypto winter.

A Lack of a Crypto Regulatory Framework Leaves Investors Exposed

With the crypto winter now set to extend into August, the need for a regulatory framework becomes more pressing.

The number of crypto platforms freezing withdrawals continues to rise, with crypto investors powerless and at the mercy of firms to resolve liquidity issues likely entwined with other exchanges.

Financial institutions don’t have it so easy and provide reporting and face regulatory scrutiny to ensure that such events do not reoccur after the 2008 global financial crisis.

Crypto firms do not need to meet criteria to remain a going concern. There is a lack of oversight to protect investor assets.

The regulatory spotlight seems more targeted toward classifying assets as commodities, securities, or “other.”

If the CFTC and the SEC are to regulate the digital asset space in partnership, the basics should form part of the debate. Otherwise, one should have authoritative control to embed the necessary processes to formulate the appropriate structure.

Some lawmakers are more progressive than others. It may contribute to the slow progress toward an appropriate regulatory landscape that doesn’t stifle innovation and protects investors.

Lawmakers See the Lummis & Gillibrand Bill Sidelined until 2023

In June, FX Empire reported on the Lummis and Gillibrand Bill, which aims to give regulatory powers to the CFTC.

As the  SEC v Ripple case drags on, with no end in sight, the collapse of TerraUSD (USDT) and TerraLuna (LUNA) caught regulators off-guard.

Since then, the G7, the White House, the US Treasury, and others have attempted to progress towards a global regulatory framework.

However, the progress is slow,  highlighted by the lack of lawmaker enthusiasm to debate the Lummis and Gillibrand Bill.

On July 19, in a joint pre-recorded interview with Gillibrand, Senator Cynthia Lummis told Bloomberg,

“It’s a big topic, it’s comprehensive, and it’s still new to many US senators.”

Lummis added,

“The wide-ranging scope of the legislation may make it difficult for lawmakers to digest quickly.”

The bipartisan bill that has found the support of the crypto industry could deliver the ideal mix of innovation and consumer protection.

While well-versed lawmakers recognize the need for innovation and regulation, crypto market sentiment towards the SEC and the CFTC is in favor of the CFTC.

The SEC and the CFTC Need Lawmakers to Decide

In June, FX Empire considered the likely battle between the CFTC and the SEC to win control of the digital asset space.

While the Lummis and Gillibrand Bill aims to pass the baton to the CFTC, the SEC remains in the hunt. The ongoing SEC v Ripple case is a focal point for investors and lawmakers.

The pushback of the Lummis & Gillibrand Bill to 2023 could even coincide with the outcome of the SEC case against Ripple.

However, lawmakers have highlighted one problem, the SEC’s targeting of crypto firms. The SEC has dished out some punitive fines that may have led crypto shops to other jurisdictions. Earlier this year, lawmakers approached Gensler, questioning the SEC tactics to which the SEC Chair may have responded.

SEC Chair Gensler softened his position, calling on the CFTC for collaboration to regulate the digital asset space. Following the call for a partnership, Gensler even talked of easing SEC regulations on crypto firms.

A shift in stance may prove positive for the crypto space. It will ultimately boil down to the answer to the puzzle. What is and isn’t a security?

In 2018, the former SEC Director of the Division of Corporation Finance said that Bitcoin (BTC) and Ethereum (ETH) are not securities.

Regulatory Uncertainty Doesn’t Breed Crypto Innovation

Uncertainty is bad for any asset class and no different for the crypto space. Since late December 2021, the talk of increased regulatory oversight adversely affected investor sentiment.

Since calls for a global regulatory framework, the landscape has changed. However, the need for a regulatory framework remains. Once market conditions improve, crypto-related firms and investors will look for legislation that supports innovation and protects consumers.

Finding the balance is crucial to cryptos and the global financial markets.