For all the grief it might have given retail investors, the FTX debacle also brought benefits. It helped deflate the crypto bubble and weed out some of the riskiest participants. has been proved.
Regulators may want the cryptocurrency market to simply burn out, putting an end to the whole bizarre episode. That would be wishful thinking. All cryptocurrencies in circulation still have a nominal value of around $850 billion, with tens of billions of dollars still traded daily. Officials must act on lessons learned from the failures of 2022 (from the Terra stablecoin collapse to FTX) to prevent new speculation from threatening the broader financial system.
Three steps in particular are helpful.
For starters: Stabilize your stablecoin. Similar to money market mutual funds, stablecoins aim to maintain a constant value in fiat currency, usually $1. But they are often backed by assets ranging from short-term corporate debt to none at all. This makes them very vulnerable to panic drawers. When it involves the sale of assets in the real world, it can confuse what credit companies need to fund their day-to-day operations. You can create a limited charter against the Federal Reserve and require a dollar representation backed by actual dollars deposited in the Federal Reserve. While this ensures stability and allows issuers to compete on the quality of their technology, it could prove particularly useful in making cross-border payments cheaper and faster.
Then suppress the exchange. FTX’s competitors, such as Coinbase Global Inc. and Binance Holdings Ltd., have yet to face the safety, integrity, or segregation of funds requirements that traditional exchanges do. This allows them to freely put their customers at risk through proprietary trading, extreme leverage, and more. We don’t have to wait for Congress to decide which regulator should be in charge, nor do we need to define digital tokens as securities, commodities, or anything else. Instead, the Securities and Exchange Commission and the Commodity Futures Trading Commission should work together to establish an industry-funded supervisor, in line with the direction of financial industry regulators.
Lastly, keep your firewall. Financial regulators have so far been successful in keeping cryptocurrencies away from traditional banks, which is one reason why his downfall of FTX has not had widespread repercussions. Whether or not we adopt specific rules, we must remain vigilant to prevent systemically important financial institutions (including non-banks) from being compromised. While digital tokens may have utility as a final representation of something of value, by themselves they have no real-world use or cash flow for assets such as commodities, stocks, and bonds. Lending to them is a waste of money.
Some worry that regulation unfairly justifies cryptography. It doesn’t have to be. On the contrary, clear regulations provide authorities with the framework they need to crack down on non-compliant actors. For example, FTX would definitely fall into this category. Beyond that, the authorities should be very clear that regulation does not imply approval. For example, as is the case with SPACs and memetic strains. Blockchain may still hold promise, but that doesn’t mean the value of cryptocurrencies.
Bloomberg Opinion Details:
• On Esperanto’s way of ciphers: David Fickling
• SBF’s apology was as empty as his empire: Lionel Laurent
• Do you have change?Why Digital Cash Needs to Feel Real: Andy Mukherjee
The editors are members of the Bloomberg Opinion Editorial Board.
Other stories like this Bloomberg.com/opinion
