How many more times will we be conned by crypto?
Why haven’t floating rate cryptocurrencies gone the way of the Beta recorder? Fifteen years of experience have laid bare their fundamental flaws.
They have no intrinsic value, offer little to no transparency, and anyone — priest or felon — can issue, operate or manage them. Sometimes we don’t even know who creates crypto coins. Their price is often driven by rumors on social media, and once users lose confidence, with no government oversight, the only way to realize any value is to sell before everyone else does. There is no house, car, securities, company or tangible value to liquidate at the bottom of a cryptocurrency run.
It should not have been surprising in 2021 when economic reality momentarily replaced irrational exuberance and the price of Bitcoin dropped precipitously. That reduction in cryptocurrency value was comparable in magnitude to the crash of the stock market in the Great Depression. Billions more dollars subsequently vanished in the bankruptcies of FTX, Genesis Global Capital, Celsius, Voyager Digital, BlockFi, and Three Arrows Capital.
Even in the face of mounting evidence exposing their flaws, cryptocurrencies have survived as crypto acolytes reflexively defend it. 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 a continuing financial faith in cryptocurrency because they see its decentralized transparency and its a “neighborhood-watch” type of oversight as the future of finance. If that were true, it would defy two centuries of experience that have painted a picture of what makes complex financial systems work.
The meteoric growth of cryptocurrency since 2009 has been as remarkable as its ability to fend off regulation, even though some have all the earmarks of a con game. Operators can collect billions of real dollars in return for a computer code that has value only to the extent that the fools who purchase it anticipate finding even greater fools to take it off their hands. What could go wrong? As the writer Dave Barry sarcastically wondered, why would FTX investors have thought it was a bad idea to trust their money to a company with a meaningless name, an incomprehensible business model, and a crypto advocate who had been “the fourth runner-up in a John Belushi look-alike contest.”
Since October, Bitcoin prices have surged from $27,000 to $45,000, pumping optimism into a battered industry. That bounce appears to be driven by the expectation that the SEC will approve crypto ETFs and wrap the business in government and institutional investor imprimaturs that will give it a much-needed facelift. We have seen these up and down fluctuations before, and they will continue as long as cryptocurrencies — whether viewed as money or securities — attempt to defy economic gravity. If the EFT rubicon is crossed, it may be a point of no return for financial stability.
How have cryptocurrencies been able to get this far without significant government oversight?
Technology always brings with it a mystique that initially anesthetizes governments and users to the risks. But crypto has been able to marshal a powerful group of promotors. The base is made up of counterculture enthusiasts — let’s call them cryptonites — who are enamored with subterranean, untraceable forms of digital money — neither of which many cryptocurrencies really are — that circumvent intrusive government oversight and traditional financial intermediaries. They naturally leap at shiny new digital objects that fit that profile despite the glaring risks.
Then there are the crytopreneurs, a group that includes crypto pioneers chasing billionaire status and investment firms locked in a race to turn the crypto mirage into new, fee-generating derivative instruments. Cryptopreneurs have showered Congress with enormous contributions to keep the gravy train chugging along. A staggering $75,000,000 was reportedly funneled into political coffers by FTX and its executives alone in 2022. At the same time, the rush for investors to get on board has apparently encouraged truncated due diligence on crypto companies. How much could have been done on 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 that swim in the sludge of cyberspace and perpetrate every possible kind of evil, on a scale never before imagined. They’ve hit the wise guy sweepstakes given how cryptocurrencies lubricate their businesses; it is well worth it for them to pump cryptocurrencies up any way possible.
How many red flags are necessary to convince Congress that computer code that can be created by digital grifters and is the darling of cyber criminals 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 more than a century ago for the banking and securities’ industries. It should never have left regulators in no man’s land to deal with issues such as the issuance of Bitcoin EFTs. It should never have forced them to the edge of the crypto rubicon.
No crypto company should be allowed to operate without adequate capital, liquidity, security, governance, and stability standards. And, most importantly, no crypto business should be able to operate in the U.S. without adhering to mandatory standards regarding the integrity, competence and experience of issuers, executives and owners. 2024 is the year when these changes must finally happen. But will that message get through all the campaign contributions and tech hype?
Thomas P. Vartanian is the executive director of the Financial Technology & Cybersecurity Center and the author of “200 Years of American Financial Panics” and “The Unhackable Internet.”