Summary The SEC has declared digital-token trading platforms Binance and Coinbase illegal, raising questions about the future of cryptocurrencies and their regulation. The financial world is struggling to define and understand digital assets, which transfer capital in innovative ways that have not existed before. Working through the issues surrounding cryptocurrencies will take time and patience, but it is necessary to create a system that protects investors and enhances the financial system. The editors of Bloomberg raise the question, "How Could Coinbase and Binance Ever Be Legal?" If these editors were to turn to China they would see how the Chinese have reacted to the world of cryptocurrencies. The Chinese have banned cryptocurrencies. The United States does not act that way. The United States' way is much more painful and time-consuming. The latest in the battle to understand what cryptocurrencies are and how they should exist has Gary Gensler and the Securities and Exchange Commission declaring that two of the world's largest digital-token trading platforms, Binance and Coinbase are illegal. But, this action only shows what these institutions shouldn't do. We are still on the road to determining what they should do. That will come! It will have to come because digital is the way the world is going. At least that is what I think. See, for example, my recent post " The Future of Everything in Banking is Digital ." First of all, we should not be surprised with the current dilemma. This is the way all innovation goes. Innovation is new. Innovation is different. Innovation may be strange. Innovation, ultimately, may not work. Innovation may be used to exploit situations. There just is a lot we don't know about innovation. So, we have to learn, we have to grow in our thinking, and we have be careful not to be taken advantage of. And, that is what we are doing. But, working things out takes time. And, working things out is not inexpensive. And, the more major the innovation is to be in our lives, the more careful we have to be. No one is happy with the time it is taking for the financial world to become "digital." But, we need to get it as "right" as we can, as early as we can. Some Simple Definitions For starters, we still seem to be stuck right at the start. We have to define things. For example, what is a security? What is a commodity? Don't we know the answers to these questions? Furthermore, what is a loophole? And, there are many more definitions to clarify. But, digital assets are innovative and transfer capital in ways that have not been in existence before. And, as many of their supporters argue, this can be done with the internet or with blockchain, and without oversight. But, as with Binance and Coinbase, as with the closed FTX, the vehicles combine products and services that we have found, through financial history, probably should not be combined to avoid conflicts of interest and should not be combined to meet disclosure requirements and/or other investor protections. Also, without the separation seen in many traditional financial systems and networks, customer funds can be used in ways that are not legal or legitimate. There is still a lot of work that needs to be done before these vehicles can be fully trusted and degenerate the confidence that our current financial system has. The thing is, much is at risk in the short run. Cryptocurrencies may be a very good thing. To find this out, the cryptocurrency world must be tested and tested and modified and modified to find out what works, what protects investors, and what enhances the financial system. This takes time. This requires patience. But, investors must see that working through all the issues as well as possible can only generate a world that is the best one we can create. The Reply Mr. Gensler is speaking out more these days. "We don't need more digital currencies," Mr. Gensler contends . "We already have digital currency. It's called the US dollar. It's called the euro or it's called the yen, they're all digital right now." I agree with this, but I also agree that innovation needs to be allowed. We don't know what the future is going to be like and so we need to keep asking questions and trying to create newer and newer answers. In a world like this, however, time and patience are needed. And, the approach Mr. Gensler has taken is not a comfortable world for many of these innovators. Those that criticize him argue that he is regulating the market through enforcement action, rather than by defining long-term rules as policy. But, this is a world heavily reliant upon the "new" for its evolution. In such a world, how can you have "long-term rules" when there is no such thing at the current time that is "long-term"? Mr. Gensler and the SEC are "learning by doing," just as all the innovators challenging them are learning by doing. Binance and Coinbase are finding this as a target to challenge. Brian Armstrong, CEO of Coinbase, argues, therefore, that their only recourse is to go to the courts to challenge Mr. Gensler. And, that is what is happening. But, this, too, will take years. This is a world of radical uncertainty. And, this is the world that investors must deal with. It is a world of complex innovation, a world where all the questions are not known let alone all the answers. Going Forward Cryptocurrencies have been pushed very hard by the libertarian thought makers. The idea was that you could have a currency that needed a minimum (hopefully zero) regulations and very little oversight (hopefully none). This is one of the dynamics of the world of innovation. People innovate and then people continue to innovate and then they innovate even more. How can I make things better? How can I make more money from some product or service? How can I take advantage of others with my innovation? This is the very nature of invention and progress. But, it is also the very nature of "how can I get around things"? and "how can I fool you"? Regulation and oversight is necessary. Right now, I am a huge fan of digital currencies, like those of the U.S. dollar, the euro, and so on. The digital world is still going to grow and expand and dominate. I am, and always have been concerned about the "crypto" world. The "crypto" world is going to have to be regulated and controlled. The unregulated and uncontrolled "crypto" world is going to produce "holes" in its system that investors will create opportunities for others to take advantage of them. The "crypto" world will become less and less interesting as the regulators and legislators get more and more into its models. This is how the world of innovation works. This is how the world of innovation is working. Investors may find very profitable opportunities, but investors may also find the glamor of the "crypto" world fading into the background as this space becomes more regulated and revealed.
