Crypto regulation a hard sell after FTX’s costly collapse

Since the spectacular, disorderly collapse of Sam Bankman-Fried’s crypto empire earlier this month, Coinbase chief executive Brian Armstrong has been at pains to assure investors and regulators that the company he co-founded in 2012 is a horse of a different colour.

But newly filed accounts for the crypto asset exchange’s Irish operation, which incorporate some telling remarks from the directors, reveal the company is facing some headwinds.

Desperate for legitimacy, Coinbase and its rival crypto exchanges have been assiduously lobbying politicians and policymakers across the world, begging for regulation to bring them from the blockchain-backed asset class into the traditional financial fold.

Armstrong wasted no time following FTX’s demise, using the ensuing controversy as a launch pad for his usual spiel. “Coinbase,” he wrote in an opinion editorial for CNBC, “doesn’t have any material exposure to FTX, but I have a lot of sympathy for everyone involved in the current situation”.

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He averred that the “risky, unethical business practices” that allegedly led FTX’s downfall are just as likely to “happen in traditional financial markets as well — and in fact, blockchain technology will make it easier to track and prosecute over time” once it is appropriately regulated.

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Perhaps there is a kernel of truth there. But Armstrong has two problems on his hands. For one, his remarks are likely to fall on deaf ears following the revelations about FTX and the wave of scandals that have emanated from the industry in recent times. Second, politicians know that any regulation conceding Armstrong’s point — that mismanagement and volatility are part and parcel of the traditional financial system as well — is likely to lead to some degree of integration between the two previously separate spheres.

Given the incredible volatility in crypto asset prices, the risks to broader financial stability of closer ties between crypto businesses and traditional institutions are potentially significant.

Crypto enthusiasts might argue that one of the reasons why the assets are so volatile is the relative newness of the market. But Coinbase Ireland’s directors have no illusions: volatility is inherent and it isn’t forecast to change any time soon.

In the 2021 accounts, the directors of the Irish entity said that although the company “does not hold crypto assets directly”, its results are dependent on the “broader cryptoeconomy”.

As such, the directors said that “due to the highly volatile nature” of the sector, Coinbase’s “operating results will continue to fluctuate significantly and it is difficult for the company to forecast growth trends accurately”. With regulatory cups already running over, Armstrong’s vision seems like a tougher sell than ever.