By letting it burn, it will not grow big enough to cause major contagion outside of crypto.
By Wolf Richter for WOLF STREET.
The last thing the crypto community – from Bankman-Fried dazzled Silicon Valley fiat-billionaire venture capitalists to true believers – will listen to is another warning from another central bank about crypto and crypto exchanges and the potential loss of “all your money.” And they certainly won’t appreciate comments, we told you, from central banks and regulators.
The last we told you about came today in a speech by the Bank of England’s Deputy Governor for Financial Stability, Jon Cunliffe. He said, “Since September, FCA [UK Financial Conduct Authority] publicly warned on FTX that “you are unlikely to get your money back if things go wrong.”
And things went wrong. Central banks and other financial regulators are concerned about the massive, tangled tentacles of crypto penetrating the fiat financial system – the problem of contagion beyond crypto.
But this year, those tentacles were cut, tentacle by tentacle, as one crypto firm and hedge fund after another imploded and took their clients’ funds with them. The most recent example is the spectacular implosion of FTX and its affiliates, including Alameda Research, leaving behind untold chaos and huge financial holes. The remnants of it all are going to be salvaged over the next few years in bankruptcy court.
So now the question arises: why even 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 enormous, unlimited and repeated losses of these users form a self-inflicted natural regulatory force that prevents the crypto space from expanding, thereby minimizing the risks of contagion beyond crypto?
Sounds like a good idea to me. And that argument, following the FTX implosion, can be heard more forcefully in various places.
And even the Bank of England’s Cunliffe today in his crypto keynote gave a nod to this theory, even as he explained why crypto should be regulated. He referenced an essay in FT Alphaville, “Let crypto burn”.
Cunliffe said in his speech:
“It is of course possible that neither of these two reasons – protecting investors and protecting against financial stability risk – is relevant because the very instability and risk of the world of unregulated crypto finance, demonstrated more recently by FTX, will be in the guarantee that the sector cannot develop.
“Indeed, some [the authors of the FT Alphaville article] advocated for regulators grappling with the crypto world to keep it out of the regulatory framework to ensure that user concerns about “caveat emptor” impede both growth and connection with traditional finance.
Instead of regulating, “It is far better to do nothing and let the crypto burn,” said the 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:
“Actively intervening would lend undeserved legitimacy to a system that does little to support real economic activity. It would also provide an official stamp of approval for a system that currently poses no threat to financial stability and lead to calls for public bailouts when crypto inevitably breaks out again.
“Finance is a matter of trust. The loss of trust due to growing failures is already driving the demise of crypto. The market capitalization of the myriad “coins” is down about 75% from its peak in November 2021.”
I agree: let the crypto burn; does not regulate it.
The crypto was born during the Fed’s money-printing frenzy and the financial crisis in January 2009. In the initial Bitcoin white paper, they called it a “system for electronic transactions without relying on the trust”. It turned out to be the opposite. Compared to existing transaction methods, including peer-to-peer methods that are free, easy to use, and managed 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 trades.
On top of all that, there are the other risks, such as your bitcoin having just been swallowed by hackers or when the exchange goes wrong or when you lose the key.
So he never became what he was supposed to become. Instead, there are now many thousands of cryptos, anyone can create their own and use it as collateral, like FTX did with their own native FTT crypto, and those cryptos are just gaming tokens in a lawless high-tech casino.
And everyone who enters the casino knows this – or should know this – because the warnings have been around for many years.
So just keep the game inside the casino, block the exits and let the casino burn itself out. And it works very well in that respect.
Unlike the ordinary financial system, this casino is not necessary for the economy, it serves no purpose, but 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 get crushed by falling debris, the venture capitalists who funded the casino and lose their shirts in it, the hedge fund clients whose fiat currency ignites before their eyes, well, they’ve been warned for years about the risks of betting on something someone just made up.
I mean, of course it worked very well for a while because everyone involved played along in an act of what I call consensus hallucination.
There is no need to regulate this. It’s self-regulated by the fact that many people will just lose a lot or all of their money. And it will prevent crypto from reaching the kind of scale that would cause serious contagion outside of crypto.
If certain technologies emerge from the crypto space that have useful and broader applications, then so much the better. They will find use in the highly regulated fiat financial system.
And the rest can just burn, no problem.
Here are the shares of some of the crypto-related companies that have yet to file for bankruptcy: today’s closing price, today’s percentage change, and implosion percentage from the top. All are featured in my imploded stock pantheon. There really isn’t much to lose:
| Crypto-Related Actions
November 21, 2022 |
Price $ | % today | % from above | |
| Coinbase | [COIN] | 41.23 | -8.9% | -90.5% |
| Robin Hood | [HOOD] | 8.85 | -3.7% | -89.6% |
| MicroStrategy | [MSTR] | 157.22 | -7.6% | -88.0% |
| Basic scientist | [CORZ] | 0.17 | -6.3% | -98.9% |
| Hive Blockchain | [HIVE] | 2.00 | -10.7% | -93.0% |
| TeraWulf | [WULF] | 0.83 | -13.4% | -98.0% |
| digital marathon | [MARA] | 6.19 | -17.1% | -92.6% |
| Riot Blockchain | [RIOT] | 3.98 | -10.8% | -95.0% |
| Hut 8 Mining | [HUT] | 1.12 | -9.7% | -93.3% |
Coinbase, among others, hit a new low today:
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