Regulators can’t keep turning a blind eye to crypto craziness

The writer is a contributing editor to the Financial Times and writes the Chartbook newsletter

In a now infamous TV commercial for the trading platform, Hollywood superstar Matt Damon echoed the following lines: “History is almost full. With those who almost ventured, who nearly achieved, but in the end, that proved to be too much. And then there’s Others. Those who embrace the moment and commit themselves. And in these moments of truth… calm their minds and harden their nerves with four simple words whispered by the audacious since the time of the Romans. Fortune favors the brave.”

The explosion was not accidental. For true believers, a technology like encryption is not just a technical solution or a get-rich-quick promise. It is something akin to a historical mission. If you subscribe to the vision, Joseph Schumpeter’s idea of ​​”creative destruction,” with its confident promise that out of the ruins of the old, something better will emerge, will be easy to deliver.

There are circumstances in which this brutal view of history is appropriate, but the million-dollar question is which historical experiences are worth the cost and which are not. Distinguishing between the two requires being able to distinguish between things that sound bold and exciting from those that actually make sense.

The Roman who is believed to have first uttered the phrase “Fortune favors the brave,” was Pliny the Elder, upon witnessing the eruption of Mount Vesuvius in AD 79. Rather than do the obvious thing and run for cover, Pliny orders his fleet to head straight for Hell in hopes of saving survivors. He died in plumes of toxic volcanic gas.

That fate will not befall Damon, nor will Tom Brady and Gisele Bundchen, who endorsed FTX, the doomed cryptocurrency exchange. And true believers in the cryptocurrency crowd won’t be deterred by a bankruptcy or two. It is up to US authorities not only to tidy up the mess left by FTX, but to reach a verdict on the crypto-side’s stated historic mission. Doing so is unavoidably political.

Stopping any inflated technological project that promises to disrupt the status quo and present a bright new future requires decisiveness, courage and actual power. There is no guarantee of success.

In the case of cryptocurrencies, the politics are particularly difficult. The inconvenient truth is that in the last midterm elections, FTX management was a big donor to the Democratic Party. It is unlikely to indicate that this materially affected the result. But try telling that to controversial Republican Sen. Josh Hawley, who seems intent on turning the Sam Bankman-Fried dealings into a great cause.

Nor did the Democrats simply take the money out of FTX. A vocal faction in the US Congress has been pressing legislation to define a new regulatory regime for cryptocurrencies. While banking regulators stayed away and the Securities and Exchange Board seemed confused, the CFTC seemed eager to take on the job. It has received encouragement from the highest levels in the form of an executive order from President Joe Biden, which has declared digital assets an area in which the United States must not lag behind international competitors.

By the summer of this year, it looked like the push for cryptocurrency recognition and regulation might gain the same momentum that, in the name of modernization, led to disastrous deregulation on Wall Street in the late 1990s.

The chaos unfolding in FTX should stop that bandwagon. A more radical alternative would be to simply allow the cryptocurrency to self-ignite. Allow Ponzi schemes to collapse under their own weight. Prosecute fraud through the usual prosecution channels but do not provide any regulatory oversight. Make it clear to anyone dealing with cryptocurrency that they do so at their own risk.

Given cryptocurrency’s isolation from the rest of finance, this malicious omission may not pose serious systemic risks, but the cost to retail investors could be serious, and with it political ramifications. Letting cryptocurrency burn may not be realistic. If so, the urgency is for regulators to no longer turn a blind eye, but instead to draw the clearest line possible. They should not simply refuse regulatory endorsement, they should prevent regulated financial institutions from entangling themselves with cryptocurrencies altogether. If there is to be regulation, it should be themed around gambling, not banking. This will antagonize the crypto lobby, who will accuse regulators of squandering invaluable American leadership in a world-changing technology.

The best response to this discourse of historical necessity is to respond to it head-on. If it’s true, as Damon warned, that history is “almost full,” it’s not simply due to a lack of nerve or good luck. Most historic projects fail, as do most businesses, because they are ill-conceived or because they run into too strong opposition. Blockchain may have some limited uses. Cryptocurrency in its simplest form will never be money. Reasonably scaled down, it may serve as a form of online gaming. But what they should have no role in is serious finance, let alone complex and opaque financial engineering. It’s time to send this illusion to the dustbin of history.

Video: Cryptocurrency: How Regulators Lost Control

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