The once-burgeoning realm of crypto and decentralized finance keeps imploding, presenting policy makers with a quandary: Should they just let it burn, or step in to address its now-obvious flaws?
I’m with the second group. To maintain their credibility, and to derive the greatest benefit from blockchain technology, regulators should intervene and crack down on scams, protect investors and ensure market integrity.
The dominoes keep falling after the demise of the FTX empire. The latest casualty, crypto lender Genesis Global Capital, probably won’t be the last. Each failure further undermines trust, reduces activity and revenue, and puts pressure on the rest of the industry. With no lender of last resort to provide emergency support — as the Federal Reserve does for traditional banks — there’s little to stop the rot.
Some think that’s just fine. They argue that crypto was largely an unproductive speculative bubble that should be allowed to deflate on its own. Investors were amply warned, and the unregulated, bank-like intermediaries to whom they unwisely entrusted their money had little or nothing to do with the potential of the underlying technology.
Yet such thinking ignores two important points. One is that the government typically takes steps to protect people who don’t have the ability or means to do so themselves. It seeks to ensure that prescription drugs are efficacious and properly deployed, that motor vehicles are safe, that roads are properly signed and maintained, that doctors and lawyers have the necessary qualifications, even that casinos don’t do excessive harm. Why should crypto be any different?
Second, why throw out the baby with the bathwater? Making investment in crypto safer would aid the development of a technology that may yet have valuable applications. Some promising areas:
- Digital identity. Under current technology, meeting anti-money-laundering and know-your-customer rules requires costly and often redundant evaluation and reporting. Blockchain has the potential to make the system more efficient, and to strike the appropriate balance between privacy and security.
- Cross-border payments. Blockchain could underpin new global payment “rails” that would improve upon slow and costly correspondent banking.
- Securities trading. By allowing money and assets to be transferred immediately and simultaneously, blockchain technology could drastically reduce the risks associated with clearing and settlement.
- Asset ownership. By enabling the use of digital tokens to represent ownership, blockchain could eliminate the need for title insurance in real estate transactions — and could promote inclusion by making smaller investments easier and less costly.
So why, one might reasonably ask, haven’t these use cases been more fully realized? New technologies can take time to result in new industries and ways of doing business, and at the early stages it’s virtually unknowable where they will lead. It took several decades for electricity generation to enable the shift to mass production and the Model T; there was a long lag between the advent of open-source software and LINUX being used in applications ranging from cloud computing to Android smartphones. Xerox’s famous Palo Alto Research Center produced innovations that ultimately brought about the personal computer and much more, even though Xerox reaped few of the benefits.
Standing idly by and letting crypto collapse is no way to maximize the benefits from this nascent technology. Instead, legislators and regulators should do their jobs: Ensure customer assets are protected and that markets have integrity; require stablecoins — tokens with values pegged to fiat currencies — to be fully backed by safe assets denominated in those currencies, such as short-term sovereign debt and central bank reserves; work with the industry to establish best practices, and enforce those standards both domestically and internationally.
So far, regulators have chosen errors of omission over commission, opting for inaction rather than risking mistakes. The result is many billions of dollars of losses, and an erosion of trust in both the industry and regulation. They need to be much more proactive.
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