Regulators cannot continue to turn a blind eye to the cryptocurrency craze

The author is a contributing editor to the FT and writes the Chartbook newsletter

In a now infamous TV commercial for the Crypto.com trading platform, Hollywood star Matt Damon intoned the following lines: “History is full of almost. With those who almost ventured, who almost reached, but in the end it proved too much for them. Then there are others. The ones that embrace the moment and commit. And in these moments of truth. . . they calm their minds and temper their nerves with four simple words that have been whispered by intrepid people since Roman times. Fortune favors the bold.”

The explosion was not accidental. For true believers, a technology like cryptography is never just a technical fix or a promise to get rich quick. It is something like a historic mission. If you accept the vision, then Joseph Schumpeter’s notion of “creative destruction” is at hand, with his confident promise that from the ruins of the old something better will arise.

There are circumstances in which this brutal take on history is apt, but the trillion-dollar question is which historical experiments are worth the cost and which are not. Distinguishing between the two requires the ability to discriminate between things that sound bold and sexy and those that actually make sense.

The Roman who is thought to have first uttered the words “fortune favors the brave”, was Pliny the Elder, witnessing an eruption of Vesuvius in AD 79. Rather than take the obvious thing and run for cover, Pliny ordered his flotilla to head directly to hell in hopes of rescuing the survivors. He died in plumes of toxic volcanic gas.

No such fate will befall Damon, nor Tom Brady and Gisele Bündchen, who endorsed FTX, the affected cryptocurrency exchange. Nor will the true believers in the crypto crowd be deterred by a bust or two. It is up to the US authorities not only to clean up the mess left by FTX, but to pass judgment on the self-proclaimed historic mission of cryptocurrencies. To do so is inevitably political.

Stopping any publicized technology project that promises to disrupt the status quo and deliver a bright new future requires resolve, courage and real authority. And there is no guarantee of success.

In the case of cryptocurrencies, politics is particularly complicated. The inconvenient truth is that in the recent midterm elections, FTX corporate executives were among the largest donors to the Democratic Party. It is far-fetched to suggest that this materially affected the outcome. But try telling Republican Senator Josh Hawley, who seems determined to turn the Sam Bankman-Fried reports into a cause célèbre.

Nor did the Democrats just take money from FTX. A vocal faction in the US Congress was pushing legislation to define a new regulatory regime for cryptocurrencies. While banking regulators stood by and the Securities and Exchange Congress looked askance, the Commodity Futures Trading Commission seemed eager to take the job. It has received encouragement from above in the form of an executive order from President Joe Biden, declaring digital assets a field in which the United States must not lag behind international competitors.

By the summer of this year it looked like the drive to recognize and regulate cryptocurrencies might gain the same kind of momentum that led to the disastrous deregulation of Wall Street in the late 1990s in the name of modernization.

The chaos revealed at FTX should stop that bandwagon. The more radical alternative would be to simply let cryptocurrencies burn themselves. Allow Ponzi schemes to collapse under their own weight. Prosecute fraud through the usual judicial channels but offer no regulatory oversight. Make clear to anyone who dabbles in cryptocurrencies that they do so entirely at their own risk.

Given cryptocurrencies’ isolation from the rest of finance, such malicious negligence may not pose serious systemic risks, but the cost to retail investors could be serious, and with it the political fallout. Letting cryptocurrencies burn may no longer be realistic. If so, the urgent imperative is that regulators no longer turn a blind eye, but instead draw the sharpest line possible. They shouldn’t just withhold regulatory approval, they should prevent regulated financial institutions from intertwining with cryptocurrencies altogether. If there is to be regulation it should be under the rubric of gambling, not banking. This will go against the cryptocurrency lobby, which will accuse regulators of squandering America’s invaluable lead on world-changing technology.

The best response to this rhetoric of historical necessity is to respond head-on. While it’s true, as Damon warned, that the story is “full of almost,” that’s not simply due to lack of courage or good luck. Most historic ventures, like most businesses, fail because they are ill-conceived or because they encounter too powerful opposition. Blockchain may have some limited uses. Crypto tokens in their most basic form will never be money. Sensibly scaled down, they can serve as a form of online gaming. What they should have no role in, however, is serious finance, not to mention complicated and opaque financial engineering. It’s time to consign that chimera to the dustbin of history.

Video: Cryptocurrencies: How regulators have lost control

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