Op-ed: No amount of regulation can make up for crypto illiteracy

by admin

As the crypto crowd ponders on what the coming year has in store for digital assets, one thing is for sure: Regulation is still on the agenda, very much so. But no amount of regulation can prevent a newbie investor from a dramatic nosedive on emotion-driven and uninformed moves. And such moves are easy to make when you have little idea of what exactly you are dealing with—which is too often the case.

Even the traditional stock market, which has been around for a while, is a terra incognita for a hefty proportion of retail investors. More than 32 percent of respondents in a 2021 Bankrate survey admitted that they didn’t understand stocks at all. But as concerning as that might be in itself, they do navigate different obstacles to those in crypto. Public companies have to play by the rules, dutifully reporting their financial information and going through regular audits. In the meantime, the exchanges where they trade their shares and brokers face their own fair share of scrutiny.

Of course, none of this necessarily means that a Main Street investor cannot treat stocks as a casino and blow their money away on risky investments. Quite the contrary, if anything, it’s their right, and that’s not what regulation is supposed to fix. The rules are there to make sure that the investor has enough information at hand to estimate the risks of a specific investment—and to give people attempting to scam investors a solid slap on the wrist, alongside a fine or jail time.

So there is something quite ironic about the fact that less financially-savvy investors seem to be more likely to invest in crypto, according to a 2020 report by the Bank of Canada. Unless the trend has changed, it’s also quite concerning, because traditional stocks have nothing on crypto when it comes to confusing impasses. It’s an innovative, tech-driven space bustling with ideas and fresh projects, but to understand what these projects even do, you often need at least a basic understanding of the tech powering the space, not just general financial literacy. So it’s no surprise that one in three digital asset holders don’t really understand cryptocurrency themselves, describing their knowledge as either nonexistent or “emerging,” according to a Cardify study from 2021.

Besides having to deal with something as confusing on its own, aspiring crypto investors also make for a lucrative target for scammers. Let’s remember the Squid Game coin and Africrypt projects that took millions from their backers’ pockets. There’s even industry jargon to describe this crypto fraud— “rug pull,” for example, was coined to name the all-too-common malicious operations where crypto developers abandon a project and run away with investors’ funds. These accounted for over $2.8 billion stolen in 2021, blockchain analytics firm Chainalysis mentioned in a recent report.

That said, one look at Bitcoin’s or Ether’s price action is enough to see that even the most trusted and battle-tested crypto investments can wipe out a considerable share of your funds on one unlucky plummet. But that’s not what novice traders go into crypto for. They want the golden ticket into a prosperous future, and the glimmering prospect takes the best of them, leading them to often overlook the high risks involved. For many, trading becomes a social activity, which is perfectly fine—as long as you know what you’re doing.

Look at the Wall Street Bets saga, for example. Too often, we think of it as a tale of retail investors, your everyday folks, coming together to flip off Wall Street, big time. What gets lost in the buzz, though, is that the daring operation took off thanks to a seasoned trader, not your regular rookie investor. The rookies were mostly losing money, if anything. In crypto, social trading can take on a whole new volume, with thousands of Telegram channels offering their hot takes on the market and its hidden gems. Sure, not all of them are scammers, but you know the problem is ample when even Kim Kardashian and Floyd Mayweather get sued over promoting a suspected crypto pump and dump.

So what’s the outtake? Just like no amount of traffic lights can teach you how to drive, no amount of crypto regulation can make up for a lack of investor understanding of the space they work with. So while crypto is heading into the mainstream, it’s high time to step up our efforts to educate retail investors about the exciting and innovative field they can delve into.

Crypto trading platforms themselves are already taking initiative in educating investors by offering all sorts of educational content on both safe trading 101 and the foundations of the technology underpinning the ecosystem. They also post explainers on red flags to look out for when reviewing new crypto projects and coins, taking aim at the scammer problem. Such efforts are worth every bit of praise, as they make it easier for retail investors to get a grasp of things in an easy-to-digest form.

But a broader awareness will take a broader effort—and it’s already high time to bring crypto to schools and colleges, especially since Gen Z seems to be really buying into the crypto edition of the get-rich-quick myth. Schools are already doing financial education, and adding crypto to the curriculum is simply a logical next step in this direction. Besides, the technical side of the matter can also inspire more students to think about things like privacy, encryption, and digital asset ownership, the values at the very foundation of crypto.

One day, regulation will make the crypto ecosystem safer and more transparent, meaning less risk for retail investors. But schools don’t need to wait for that day to start off with their own educational plans and projects, and, in the long run, this will do more for investor safety than lawmakers ever could.

Guest post by Vasja Zupan from Matrix

Vasja Zupan is the President of Matrix, the first Virtual Assets MTF (Multilateral Trading Facility) and Custodian to be launched under the regulations of the Financial Services Regulatory Authority of ADGM (Abu Dhabi Global Market). Prior to joining Matrix Exchange, he was COO at Bitstamp, EU’s first fully licensed and the world’s longest-standing cryptocurrency exchange, and managed the turnaround of the distressed Kolektiva Group multinational for the German Rebate Networks VC.

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