As cautionary tales go, it would be hard to concoct a stranger fiction about the shady side of cryptocurrency than the true-life story of QuadrigaCX.
The Canadian chief executive of the cryptocurrency exchange platform died suddenly in December – an event the company appeared to have never planned for. No one else has access to many of Quadriga’s operations, and the exchange shut down in January. Attempts to crack the encrypted laptop used to manage the business have proven unsuccessful. Passwords are missing, cutting off access to secure offline storage – known as cold wallets – that may hold as much as $180-million in funds. More than 100,000 people who bought cryptocurrency through Quadriga are owed about $250-million. What is not stuck in cold storage is held by numbered companies and payment processors, or in bank drafts that have been difficult to deposit – banks are understandably hesitant about dealing with the cryptocurrency sector.
Cryptocurrency is a digital form of payment that, unlike traditional currencies such as the Canadian dollar, is not managed by a government. For many people, that cryptocurrencies are detached from the state and seem to exist on a plane above the law are chief selling points. But when things go wrong, investors are forced to return to earth and to their only recourse: the law.
Quadriga has been granted protection from its creditors while a court-appointed monitor oversees the hunt for investors’ funds. Meanwhile, lawyers are jockeying to represent Quadriga’s users. This insolvency process is unusual, because Quadriga has little in the way of traditional assets or bank accounts. The case underscores how badly regulation is needed in this burgeoning industry.
It would be easy to say that, when it comes to the highly speculative world of cryptocurrency, “buyer beware” should be the only rule. After all, the value of such instruments is notoriously volatile.
But just because something is risky doesn’t mean it should be unregulated. Rules apply to a tech startup’s stock, no matter how uncertain its future value; to investment funds, regardless of their investments. People can’t expect to be protected if investments don’t work out, but they can and should expect those investments, and the people peddling them, to be subject to some basic rules. Those include disclosure of risks, assurances that people will have access to and control over their own money, and guarantees that funds won’t disappear or be stolen.
Regulating cryptocurrencies won’t be easy. To start with, it’s not clear what they are. They claim to be currencies, and a new way to contract and manage transactions. At this point, however, they’re mostly being used as speculative investment vehicles, with their inherent secrecy also offering opportunities for money laundering and tax evasion.
Provincial securities authorities under the Canadian Securities Administrators (CSA) have said they will apply securities laws to companies that raise money through offerings of digital tokens or coins. For tax purposes, the Canada Revenue Agency considers them a commodity, and any transaction paid in cryptocurrency to be bartering.
For regulators, logistical questions remain. For example, are existing laws against money laundering and fraud sufficient, or are new ones needed? Are securities regulators, who already struggle to enforce existing rules and to punish fraudsters, up to the task of overseeing even more transactions?
There’s an argument to be had about whether cryptocurrency should be regulated through the existing financial system. But there’s no argument for allowing it to operate outside of the rules, or for abdicating responsibility altogether.
Fortunately, there is already movement on this front. The Group of 20 countries have said they want to develop co-ordinated regulations, to be put in place by next year. Canada’s House of Commons finance committee has recommended that exchange platforms used to buy and sell cryptocurrencies be required to carry a licence and be regulated as money services, with steps taken to deter laundering. It also advised that providers of wallets for storing such digital coins and tokens should require identification from users, so that law enforcement can track illegal activity.
This isn’t about punishing cryptocurrency users. By addressing the market’s dark side, regulation could increase trust. Advocates of innovation should welcome that. Those responsible for protecting consumers should insist on it.