The recent meltdowns in cryptocurrency markets has wiped out more than $2 trillion in value which has been shoulder by many smaller retail investors. This bear market has shown a light on many areas of crypto markets that created and accelerated the crash. Even though we are still in the middle of the crypto winter it's time to talk about the need for tougher financial regulations.
Just like the traditional market crash of 2008 we need to look at the factors and players that got us to where we are at today. This crash has exposed vulnerabilities i markets reminiscent of previous financial turmoil. Extreme volatility and the collapse of specific stablecoins resulted in a run on liquidity that over leveraged traders and companies could not handle.
Global financial stability wasn't threatened like many once though, but systemic risks will grow as crypto becomes more intertwined with the wider financial system and going forward we can't have total collapses like we had with Terra Luna or hedge funds like Three Arrows filing for bankruptcy. Without enhanced regulatory and law enforcement frameworks we will continue to people and/or companies taking on too much risk. Just look at centralized crypto lending business, Celsius. They took deposits in cryptocurrency and they promise a yield on it. To get that yield they put those assets into very risky projects or into things that have a long liquidity horizon. This liquidity horizon did not account for the risks of a run on the lender and customers who expect to be able to withdraw their funds within 24 hours now have them locked up for months. This is why Celsius ended up freezing withdrawals and were forced to sell a huge amount of crypto. These action caused the selloff to accelerate.
The thing is technology doesn’t necessarily change the laws of economics and finance risks. I think decentralization reduces risk, but at this stage of adoption there is just way too much centralization. If this is going to be the case we need now to have regulatory system that will understand these new systems and manage those risks in terms of the crypto ecosystem and how they tie back into traditional economic systems.
I don't know what the regulation will look like, but I think we need to verify that companies and traders don't over leverage themselves. Companies need to carry enough capital in actual stablecoins are fiat to make sure there can maintain withdrawals. I think there has be predatory marketing of leverage on crypto. I there should be min account sizes for getting leverage. There needs to be investigation into market manipulation and tracking of hedge fund wallets. I'd also like to see a more robust and streamlined process for taxes. I know many don't like the regulation, but to continue adoption we need it. If crypto gets as big as I think it will we can live in the wild west.