By letting it burn, it won’t get big enough to cause a major contagion outside of crypto.
By Wolf Richter for WOLF STREET.
The last thing the cryptocurrency community — from Bankman-Fried-dazzled Silicon Valley fiat-billionaire venture-capitalists to true believers — is going to heed another warning from another central bank about cryptocurrency and crypto trading and potentially losing out” all your money.” And they certainly won’t appreciate the comment now emerging from central banks and regulators.
The last one we told you came today in a speech by the Deputy Governor for Financial Stability of the Bank of England, Jon Cunliffe. He said, “since September, the FCA [UK Financial Conduct Authority] publicly warned on FTX that “it’s unlikely you’ll get your money back if things go wrong.”
And things went wrong. Central banks and other financial regulators are concerned about the huge, tangled tentacles of cryptocurrencies reaching into the fiat financial system – the issue of contagion beyond cryptocurrencies.
But this year, those tentacles have been severed, tentacle by tentacle, as one cryptocurrency and hedge fund after another imploded and took their clients’ funds with them. The most recent example was the spectacular implosion of FTX and its affiliates, including Alameda Research, which left untold chaos and huge financial holes in its wake. The debris of all this will be collected in the next few years in bankruptcy court.
So now the question arises: why regulate this thing? Why not let it self-destruct before it gets big enough to pose a real risk of contagion? Why not let the unlimited and repeated huge losses of those users form a natural self-inflicted regulatory force that prevents the crypto space from expanding, thus minimizing the risks of contagion beyond cryptocurrencies?
I think it’s a good idea. And that argument, after the FTX implosion, can be heard more forcefully in different places.
And Cunliffe of the Bank of England, in his speech on cryptocurrencies today, also gave a nod to this theory, even as he outlined why cryptocurrencies should be regulated. He referred to an essay in FT Alphaville, “Let crypto burn”.
Cunliffe said in his speech:
“Of course it is possible that neither of these two reasons – investor protection and protection against financial stability risk – are relevant because the instability and riskiness of the world of unregulated cryptofinance, most recently demonstrated by FTX, ensure that the sector does not can grow.
“Indeed, some [the authors of the FT Alphaville article] they argued that regulators grappling with the cryptocurrency world keep it out of the regulatory framework to ensure that users’ caveat emptor concerns prevent both growth and connection to traditional finance.
Instead of regulation, “It is far better to do nothing and let cryptocurrencies burn,” said authors of the FT Alphaville article Stephen Cecchetti (president, international finance at Brandeis International Business School) and Kim Schoenholtz (professor emeritus at NYU’s Stern School of Business).
They said in their essay:
“Active intervention would give undeserved legitimacy to a system that does little to support real economic activity. It would also provide an official seal of approval to a system that currently poses no threat to financial stability and lead to calls for public bailouts when cryptocurrencies inevitably explode again.
“Finance is all about trust. The loss of trust caused by the growing bankruptcies is already leading to the end of cryptocurrencies. The market capitalization of the myriad of “coins” has declined by around 75% since its November 2021 peak.”
I agree: let cryptocurrencies burn; don’t adjust it.
The cryptocurrency was born during the Fed’s money printing binge and financial crisis in January 2009. In Bitcoin’s initial white paper, they called it a “system for electronic transactions without relying on trust.” It turned out to be the other way around. Compared to existing transaction methods, including free, easy-to-use peer-to-peer methods operated by the fiat currency banking system, it is difficult and expensive to use Bitcoin for transactions. And given its volatility, it is also risky to use it for transactions.
On top of all of this are the other risks, like your bitcoin just gobbled up by hackers or when the exchange goes down or when you lose your key.
So it never became what it was said it would become. Instead, there are now many thousands of cryptocurrencies, everyone can create their own and use it as collateral, as FTX did with their native FTT cryptocurrency, and these cryptocurrencies are nothing more than gambling chips in a lawless high-tech casino.
And everyone who enters the casino knows – or should know – because the warnings have been around for many years.
So keep the gambling inside the casino, block the exits and let the casino burn down on its own. And it’s doing well in that respect.
Unlike the normal financial system, this casino is not needed by the economy, it serves no purpose, but it burns large amounts of energy during the mining process. If this system disappeared, the economy would continue to function well.
The public who ventured into the casino and are being crushed by falling debris, the venture capital investors who bankrolled the casino and are losing their T-shirts, the hedge fund clients whose fiat money is burning up in front of in their eyes, well, they’ve been warned for years about the risks of betting on something that someone has just invented.
I mean, it definitely worked out great for a while because everyone involved played out an act of what I call consensual hallucination.
There is no need to regulate this. It self regulates by the fact that many people will lose a lot or all of their money. And that will prevent cryptocurrencies from reaching the kind of scale that would cause major contagion outside of cryptocurrencies.
If some technology emerges from the crypto space that has useful and broader applications, then great, great. They will find employment in the highly regulated fiat financial system.
And the rest can just burn, no problem.
Here are the shares of some of the cryptocurrency-related companies that have not yet filed for bankruptcy: today’s closing price, today’s percentage change, and percentage implosion from the high. All of them are present in my pantheon of imploded strains. There really isn’t much to lose:
|Stocks related to cryptocurrencies
November 21, 2022
|Price $||% today||% from above|
|Hut 8 Mining||[HUT]||1.12||-9.7%||-93.3%|
Coinbase, among others, hit a new low today:
Do you like reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. He clicks on the mug of beer and iced tea to find out how:
Want to be notified by email when WOLF STREET publishes a new article? Sign up here.