The Failed Promise Of Unregulated Crypto

By Chris Edmonds, Chief Development Officer, ICE

Markets have short memories.

Four years ago, ICE created a fully-regulated, physically-delivered crypto futures market, with institutional-grade custody provided by ICE’s then-subsidiary, Bakkt. The custodian was regulated by the New York State Department of Financial Services - a license which is, rightly, not easy to obtain - and all crypto transactions were protected by our highly regulated clearing house.

Why did we start here?

The answer is simple. The history of markets shows that physically delivered commodities provide price signals and allowing such pricing to occur in a transparent manner with clear rules INCREASES consumer confidence.

Working with Bakkt, ICE spent two years building from the ground up the safest version of a custody solution for digital assets. We built a custodian to store physical bitcoin with round-the-clock, state of the art security. We offered the most regulated environment for institutions to trade an unregulated asset class.

It was months and months of work, not without setbacks, and requiring copious amounts of perseverance and patience. But we were propelled by a vision to bring a regulated, connected infrastructure to digital assets to build confidence in crypto. And in doing so, we were applying a vision that has been consistent with our focus these past two decades – to bring transparency and trust to unregulated markets.

That was in 2019. The market did not then - and we believe evidence continues to show still does not - value the fully regulated, physically delivered crypto market. Rather, the market continues to congregate around the unregulated or cash-settled crypto markets, even despite news of some crypto firms defrauding customers of their money. So, we are perplexed by the supposed disappointment in the market on the recent news that another venture to bring a regulated custodian crypto service was recently abandoned.

The success of the regulated, cleared model has proven itself over again - through the volatility of the pandemic, the Ukraine war, and the UK’s mini budget. When the market was sucked into the hype around FTX, we consistently said that the crypto market remained immature and volatile, and that it was at risk of market manipulation, fraud, illicit finance and lack of governance, with economic, technical, ethical and public policy issues that needed to be addressed. The well-publicized failures in crypto over the last year show that the “traditional” finance model - with aspects like segregated customer funds - exist to keep customers’ money safe and secure.

The exchange and clearing industry provide critical financial infrastructure so that markets can discover the price of an asset and manage risk. And over the past 18 months, the industry has done that consistently through some of the most volatile trading days ever witnessed. Belts and braces of trading finance have an underappreciated mature role. We should not forget these strengths and we must not allow rules around crypto to create regulatory arbitrage which would be detrimental to the stability of the market. Crypto can only develop as a true asset class if it follows existing regulation under which markets in the real world operate.