The once-thriving realm of cryptocurrencies and decentralized finance continues to implode, presenting policy makers with a dilemma: should they just let it burn, or step in to address its now glaring flaws?
I’m with the second group. To maintain their credibility and to make the most of blockchain technology, regulators should step in and crack down on scams, protect investors, and ensure market integrity.
The dominoes keep falling after the end of the FTX empire. The latest victim, cryptocurrency lender Genesis Global Capital, probably won’t be the last. Each failure further undermines confidence, reduces business and revenue, and puts pressure on the rest of the industry. Without a lender of last resort to provide emergency support – as the Federal Reserve does for traditional banks – there is little to stop the rot.
Some think it’s okay. They argue that cryptocurrency was largely an unproductive asset bubble that should be left to deflate on its own. Investors were widely warned, and the unregulated, bank-like intermediaries they recklessly entrusted their money to 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 it themselves. Try to ensure that prescription drugs are effective and properly dispensed, that motor vehicles are safe, that roads are properly marked and maintained, that doctors and lawyers have the necessary qualifications, even that casinos don’t do undue harm. Why should cryptocurrencies be any different?
Second, why throw the baby out with the bathwater? Making cryptocurrency investments safer would aid the development of a technology that may still have valuable applications. Some promising areas:
• Digital identity. With today’s technology, compliance with anti-money laundering and customer knowledge rules requires expensive and often redundant assessments and reports. Blockchain has the potential to make the system more efficient and to strike the right balance between privacy and security.
• Cross-border payments. Blockchain could underpin new global payment “rails” that would improve upon slow and expensive mail order banking.
• Securities trading. By enabling the immediate and simultaneous transfer of money and assets, blockchain technology could dramatically reduce the risks associated with clearing and settlement.
• Ownership of assets. 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 cheaper.
So why, one might reasonably ask, weren’t these use cases more fully realized? New technologies can take some time to lead to new industries and ways of doing business, and in the early stages it is virtually unknowable where they will lead. It took several decades for electricity generation to enable the transition to mass production and the Model T; there has been a long gap between the advent of open-source software and the use of LINUX in applications ranging from cloud computing to Android smartphones. Xerox’s famed Palo Alto Research Center produced innovations that eventually led to the personal computer and much more, though Xerox reaped few of the benefits.
Standing by and letting cryptocurrencies collapse is no way to maximize the benefits of this nascent technology. Instead, lawmakers and regulators should do their job: to ensure that customers’ 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; collaborate with industry to establish best practices and enforce those standards both nationally and internationally.
Until now, regulators have preferred errors of omission to commissions, opting for inaction rather than risk being wrong. The result is many billions of dollars in losses and an erosion of trust in both industry and regulation. They need to be much more proactive.
More from Bloomberg’s opinion:
• The crackdown on cryptocurrencies has just begun: Lionel Laurent
• FTX is planning a return: Matt Levine
• Will cryptocurrencies ever be a safe investment?: Andy Mukherjee
This column does not necessarily reflect the opinion of the editorial board or of Bloomberg LP and its owners.
Bill Dudley is a columnist at Bloomberg Opinion and a senior advisor at Bloomberg Economics. A senior research fellow at Princeton University, he was president of the Federal Reserve Bank of New York and vice chairman of the Federal Open Market Committee.
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