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“I hate to say I told you so” is an oft-repeated but rarely sincere phrase. It’s a delightful feeling to take credit for giving advance warning of a problem. It’s a liberty I take with federal financial regulators at the United States Securities and Exchange Commission.

In January of this year, when I was a member of the SEC’s Investor Advisory Committee which advises SEC Chairman Gary Gensler on crypto and other issues, I filed a petition with the SEC . I asked them to open an official public comment on the unique issues presented by crypto and other digital assets. I indicated that crypto custody and intermediary conflicts of interest were key issues that the SEC should address.

I called this new beginning a “Digital Asset Regulation Genesis Blockthat would help the SEC improve crypto regulation. The SEC aggressively ignored me.

The inability of the SEC and US banking regulators to adapt the rules to crypto intermediaries did not directly cause the explode at FTX. Yet their failure to create working rules for U.S. crypto intermediary exchanges to hold crypto created an environment where scammers like Sam Bankman-Fried could thrive overseas.

Let’s start with the basics. The purpose of crypto is not to have a new trading product within the traditional financial system. Crypto is a revolution in finance that empowers asset owners.

The thing is, individuals get the same control over their assets that Goldman Sachs partners get over their assets when they transfer, lend, and trade cryptos in a decentralized financial system.

Related: Federal regulators prepare to pass judgment on Ethereum

Doing this correctly is a huge responsibility for new users. This requires knowing the smart contract code you are interacting with, familiarizing yourself with cold storage wallets, and basic operational security for encryption keys.

The full revolution will take time. The revolution will not be brought to you by JPMorgan (so don’t buy the JPMorgan Coin). Still, most new users will initially enter crypto through custodian intermediaries that look a bit like traditional financial intermediaries.

Intermediaries who hold crypto for newbie retail users need a rulebook to protect customers from conflicts of interest and custody games – i.e. the FTX/Alameda playbook . Yet the cookie-cutter application of the rules promulgated for paper stocks under the 1933 and 1934 Acts is not enough.

Federal banking and securities regulators have created artificial friction for banks and brokers trying to hold crypto assets under existing rules. On the other hand, they insist that federal regulation is essential to protect customers. As crypto exchanges navigated between this rock and hard place created by US regulators, the FTX fraud flourished overseas.

Crypto exchanges require intelligently designed custody rules. Although this would not have solved the problems of FTX’s overseas exchange, it would rather have helped more international retail business in the United States.

Efforts by existing crypto exchanges to seek clarification from the SEC on crypto custody have hit a brick wall. States such as Wyoming have developed a pathway for bank custody of crypto, but the Fed refuses to give these banks access to key Fed accounts.

Related: 5 reasons why 2023 will be a tough year for global markets

The Federal Deposit Insurance Corporation has advised banks that any crypto custody effort will require the bank to explain itself to its bank examiners. This is regulator language for “don’t touch it”. Many crypto exchange lawyers tell a similar story about the SEC filing for an alternative trading system license that has been slow to die.

We will soon hear regulators complaining that if only they had a little more power and a little more funding, they could protect crypto customers. This illusionistic style of mismanagement is no different from Bankman-Fried avoiding demands for diligence from investors.

Keep an eye on my lovely assistant (not on what’s under the table).

Crypto needs protection from regulators. Crypto innovators are developing solutions like multi-signature wallets and Merkel tree root-based reserve protection that is light years ahead of traditional banking customer protection and exchange retention. Just because Bankman-Fried didn’t use them doesn’t mean they aren’t real.

If the SEC and banking regulators want to be part of the solution, rather than part of the problem, they should do two things. First, start the Genesis block process of digital asset regulation in all agencies. Then, when securities and banking lawyers for crypto intermediaries knock on the door with great ideas for complying with suitable rules, listen up.

JW Verret is an Associate Professor at George Mason Law School. He is a crypto-forensic CPA and also practices securities law at Lawrence Law LLC. He is a member of the Advisory Board of the Financial Accounting Standards Board and a former member of the SEC’s Investor Advisory Committee. He also leads the Crypto Freedom Lab, a think tank fighting for policy change to preserve the freedom and privacy of crypto developers and users.

This article is for general informational purposes and is not intended to be and should not be considered legal or investment advice. The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

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