In the wake of the FTX crash, calls to regulate cryptocurrencies have increased among US lawmakers. But doing so would lend legitimacy to the cryptocurrency industry, a prominent economist argued this week, which in turn could lead to more widespread economic damage.
Stephen Cecchetti, an economist and professor at the Brandeis International Business School, pointed to the domestic economy World of Warcraftan online video game with millions of players.
“The strongest argument, I think, against regulation is about conferring legitimacy,” he said in a debate on cryptocurrencies hosted by the Brookings Institution.
“I think a lot of these things are like a video game, so if I look at an analog, the World of Warcraft it has 120 million players and it has an economy at its core,” he continued. “Fortunately, no federal financial regulator has the responsibility to oversee the World of Warcraft. And while there’s money involved, I don’t think any of us would call on them to oversee massively multiplayer online games. As the World of Warcraftcryptocurrencies, in my view, do nothing to support the real economy, so legitimizing them will simply mean draining creative resources from productive activities.”
Creating cryptocurrency-specific regulations, he said, would affect how banks approach the sector.
“The legitimacy of cryptocurrencies will encourage banks to buy cryptocurrencies directly and lend them as collateral,” he said. “Imagine where we would be if leveraged financial intermediaries held cryptocurrencies in November 2021 before the value crash.”
Cryptocurrencies have fallen sharply in value since the end of last year. Bitcoin, the largest cryptocurrency, has lost more than 60% of its value this year.
If “basically all transactions in the cryptocurrency world remain within the cryptocurrency world with no links to the real economy,” Cecchetti said, then “it would be like this stuff happening on Mars, and it would leave the traditional financial market system unaffected. That should be our goal.”
As for misconduct in the industry — the “signature hallmark of the cryptocurrency world,” in his view — prosecutors can address it by “aggressively enforcing existing laws and, where appropriate, prosecuting celebrities who are promoting such things.” “, he said.
FTX founder Sam Bankman-Fried was charged with eight criminal counts, including two counts of wire fraud and six counts of conspiracy related to securities and commodity fraud, money laundering and violations of campaign finance laws.
“Let Cryptocurrencies Burn”
Calls for more regulation have gained traction in recent weeks following the epic FTX crash.
Last weekend, Senator Sherrod Brown, chairman of the Senate Banking Committee, called for more regulation and left open the possibility of banning cryptocurrencies, although he acknowledged it would be “very difficult because it will go offshore and who knows how it will work. “
In a statement following Bankman-Fried’s arrest in the Bahamas, Brown said: “Things that look and behave like securities, commodities or banking products must be regulated and overseen by the responsible agencies that serve consumers… Cryptocurrencies don’t get a free ride because it’s bright and shiny.
But Cecchetti says it would be better to “let cryptocurrencies burn,” as he and NYU Stern School of Business professor Kim Schoenholtz wrote in a recent Financial Times column.
“In the aftermath of the FTX crash, authorities should resist the urge to create a parallel legal and regulatory framework for the cryptocurrency industry,” they wrote. “It’s much better to do nothing and let the cryptocurrencies burn.”
Actively intervening, they added, “would provide an official seal of approval to a system that currently poses no threat to financial stability and lead to calls for public bailouts when cryptocurrencies inevitably explode again.”
Our new weekly Impact Report newsletter examines how ESG news and trends are shaping the roles and responsibilities of today’s executives. Sign up here.