“F–k regulators.” Mission accomplished?

The FTX scam screams out for legislative action to protect both consumers and innovators. But will anyone listen?

In the mythology of ancient Greece, Cassandra is noted for warning her countrymen that Troy would fall unless Helen, the wife of the king of Sparta, was returned to her husband. As a reward for her emotional labour, Cassandra was remembered by history as a hysterical woman to whom no one paid heed, in spite of being oh so very right.

Given the events of the past year, the same could be said for anyone in Canada who has been sounding alarm bells over our lack of a framework for web3 based digital assets, like cryptocurrencies. 

In spite of repeated warnings from regulators and industry groups, Canada still does not have a comprehensive framework to protect investors, innovators, and consumers who are working with blockchain enabled digital assets. 

Canada is now paying a dear price for this failure to act.

It’s cost our economy jobs and capital. For example, Canadian Vitalik Buterin, founder of the blockchain Ethereum, years ago chose to base in Switzerland instead of Canada. This was due in part due to the Swiss having a comparatively clear legal framework for the treatment of crypto assets. At writing, Ethereum’s market capitalization is nearly $150B USD. To say having Vitalik’s organization base in Switzerland was a loss for the Canadian economy is a sadly hilarious understatement. 

Given the balkanized, incomplete regulatory environment in Canada, few innovators see it as a stable place to do business, which is having the net effect of chasing away future capital and talent. And it’s not just market capital that our lack of cohesive policy is chasing away. As I wrote in The Line over the summer, web3 has an enormous potential to transform many areas of life for the better. Why shouldn’t we be developing those here at home?

At the same time, Canada’s lack of framework has also allowed fraudsters to take advantage of people. For example, in the same article I mentioned above, I also wrote about how a lack of clarity on rules and policy could make it easier for money laundering and terrorist financing to occur. 

Because web3 digital assets is a new field that people don’t really understand but is accessible, flush with cash, and has few rules, scammers have flocked to it. The QuadrigaCX Ponzi scheme is the biggest homegrown example of web3 fraud to date. I’m very worried there will be others.

While this incident and others have cost Canadian investors millions, Canada still doesn’t have a comprehensive regulatory system, particularly one that is consistent at the subnational level. And more importantly, nor do we have a system that provides easy-to-understand financial education for average investors who are desperately looking for ways to make money in a cost-of-living crisis, are watching Instagram influencers get rich on crypto, but have zero understanding of the risk that they’re taking.

The Trojans who ignored Cassandra look absolutely brilliant in comparison to us right now.

So in an attempt to fix this, I tabled a bill in February of this year that would require the federal government to develop a framework that would provide the certainty that investors and innovators need to grow in Canada, but that would also protect consumers. It is non prescriptive, in that if passed, it will give Parliamentarians considerable flexibility to define the scope of what would be in the policy framework. It is non-partisan in nature, not taking any position outside of the fact a framework is needed, and provides details on how a framework should be developed. Even then, the bill allows for significant amendment on this front if it progressed to a review at a legislative committee.

Prior to tabling the bill, there had been no prior attempt made in the Canadian Parliament to do any of this, which is frankly embarrassing. To make sure I got it right, I talked to many groups with a wide variety of opinions on how to approach the matter.

On one extreme, I was told that instead of trying to develop a framework we should just outright ban cryptoassets. This approach, most notably taken by the Chinese government, is akin to blaming Bernie Madoff’s famous Ponzi scheme on email because he was able to use email technology to lure victims. In addition to being a vast overreach of government that would chill investment across the entire digital economy, banning won’t work. There are too many widespread uses of web3 technology already deployed in our day-to-day lives. And banning cryptoassets themselves won’t solve bad corporate governance and people who are blinded by a “too good to be true” scenario when they see their friends and celebrities getting rich, as people clearly did with Sam Bankman-Fried and FTX.

And on the other extreme, I was advised that there should be no additional government oversight whatsoever. Folks espousing this view were likely benefiting somehow, at the expense of others, from the lack of consistent and enforceable scrutiny of activities. As a right-of-centre politician, I believe the tendency of any government is to overregulate. However, I also support upholding law and order. Particularly this week with the FTX debacle, it’s clear there is a need for some sort of additional oversight.

Fortunately, these extremes weren’t the mainstream view. Most in industry, law, and academia that I spoke to felt that Parliament could do a lot of good if it engaged with experts in the area to drive a growth framework that included more clarity on a wide variety of policies, including potential regulations. The consistent point that was made to me was that these discussions should be informed by those who are actually working in the area, and not done solely behind closed doors within the public service. There are many ways that we can solve the problems we’re facing without killing investment in Canada, including methods the innovator community are suggesting themselves. The final version of the bill reflects this position. 

However, since I put my bill on the floor of the House of Commons, a lot has happened. The use of cryptocurrencies in the trucker convoy, the QuadrigaCX documentary, and the loss of value of many cryptocurrencies which began in part due to the collapse of TerraUSD have all brought cryptocurrencies into the public mainstream, and not in a good way. Legislators of all political stripes that may have been bullish about talking about growth in web3 based digital assets in early 2022 are probably less so now. 

As Sam Bankman-Fried said in a recent interview, “F–k regulators”. Indeed.

But these are all reasons for why what my bill proposes to do is even more important than ever. If Canada can’t urgently produce a coordinated policy framework for web3 based digital assets that both encourages growth and protects consumers, we will continue to lose jobs to other jurisdictions and people will continue to be scammed. 

So on Monday morning I will rise in the House of Commons and give this warning, and a solution, to my colleagues.

For the sake of the country, I can only hope that I’m not doomed to Cassandra’s fate after I do.