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How many more times will we be scammed by crypto?
Why did floating rate cryptocurrencies not suffer the same fate as the Beta recorder? Fifteen years of experience have highlighted their fundamental flaws.
They have no intrinsic value, offer little to no transparency, and anyone—priest or criminal—can issue, mine, or manage them. Sometimes we don’t even know who creates cryptocurrencies. Their prices are often driven by rumors on social media, and once users lose trust, without government oversight, the only way to realize any value is to sell before everyone else does. There are no homes, cars, stocks, businesses, or tangible assets to liquidate at the bottom of a cryptocurrency rush.
It should have come as no surprise in 2021 that economic reality momentarily replaced irrational exuberance and the price of Bitcoin fell precipitously. This reduction in the value of the cryptocurrency was of a magnitude comparable to that of the crash stock market during the Great Depression. Billions more dollars were then lost in bankruptcies. FTX, Genesis Global Capital, Celsius, Digital Travel, BlockFiAnd Capital of the Three Arrows.
Even in the face of mounting evidence exposing their flaws, cryptocurrencies have survived thanks to the knee-jerk defense of their crypto acolytes. They dismiss pioneers like Sam Bankman-Fried (FTX) and Changpeng Zhao (Binance) as one-off anomalies who strayed from the true gospel. Investment experts rationalize maintaining financial faith Investors are very attached to cryptocurrency because they see its decentralized transparency and close-knit surveillance as the future of finance. If this were true, it would go against two centuries of experience that have helped paint a picture of how complex financial systems work.
The meteoric rise of cryptocurrencies since 2009 has been as remarkable as their ability to evade regulation, even if some have the hallmarks of a scam. Operators can collect billions of real dollars in exchange for computer code that is only as valuable as the idiots who buy it anticipate finding even bigger idiots to take it out of their hands. What could possibly go wrong? As writer Dave Barry sarcastically asked, why would FTX investors think it was a bad idea to entrust their money to a company with a meaningless name, an incomprehensible business model, and a cryptocurrency advocate who had been “the fourth runner-up in a John Belushi lookalike contest.”
Since October, Bitcoin’s price has surged from $27,000 to $45,000, injecting renewed optimism into a battered sector. The rally appears to be driven by the expectation of SEC approval Crypto ETFs and wrap the company in the seals of government and institutional investors who will give it a much-needed facelift. We have seen these ups and downs before, and they will continue as long as cryptocurrencies – whether considered money or securities – attempt to defy economic gravity. If the EFT Rubicon is crossed, it could be a point of no return for financial stability.
How did cryptocurrencies get so far without significant government oversight?
Technology always comes with a mystique that initially numbs governments and users to the risks. But crypto has managed to assemble a powerful group of proponents. That base is comprised of counterculture enthusiasts—let’s call them cryptonites—who are fascinated by underground, untraceable forms of digital money—unlike many cryptocurrencies—that bypass intrusive government surveillance and traditional financial intermediaries. They naturally flock to shiny new digital objects that fit that profile despite the glaring risks.
Then there are the cryptopreneurs, a group that includes crypto pioneers chasing billionaire status and investment firms racing to turn the crypto mirage into new, fee-generating derivatives. Cryptopreneurs have flooded Congress with huge contributions to keep the wealth train rolling. A staggering number $75,000,000 was reportedly funneled into political coffers by FTX and its executives alone in 2022. At the same time, the rush of investors to get on board has apparently encouraged truncated due diligence on crypto companies. What could be done about FTX, which we now know had inadequate governance, management and record keeping?
The bottom rung of the crypto matrix is occupied by what I call cryptocreeps, the despicable online criminals, hackers, terrorists, and sexual deviants who swim in the mud of cyberspace and commit all manner of mischief, on a scale never before imagined. They have hit the jackpot given how cryptocurrencies lubricate their businesses; it is well worth it for them to inflate cryptocurrencies by any means possible.
How many red flags are needed to convince Congress that computer code created by digital crooks and that is the darling of cybercriminals can never be a stable or reliable financial instrument, at least in its current form? Congress must act and build a modernized oversight system where regulators have unquestioned authority to protect consumers and financial systems, as it did over a century ago for banking and securities. It should never have left regulators in no man’s land to deal with issues like securities issuance. EFT BitcoinIt should never have forced them to the edge of the crypto Rubicon.
No cryptocurrency business should be allowed to operate without adequate capital, liquidity, security, governance, and stability standards. And, most importantly, no cryptocurrency business should be allowed to operate in the United States without adhering to mandatory standards regarding the integrity, competence, and experience of issuers, officers, and owners. 2024 is the year these changes must finally happen. But will this message be delivered despite all the campaign contributions and hype surrounding the technology?
Thomas P. Vartanian is executive director of the Financial Technology & Cybersecurity Center and the author of “200 Years of American Financial Panics” and “The Unhackable Internet.”