I Agree: Don’t Regulate Crypto, Let it Burn. Making Good Progress on its Own

By allowing it to burn, it won’t grow large enough to cause serious infection outside of crypto.

By Wolf Richter for WOLF STREET.

The last thing the crypto community – from Bankman-Fried-bedazzled Silicon-Valley fiat-billionaire venture-capitalists to true believers – would listen to another warning from another central bank about crypto and crypto exchanges and possibly lose “all your money.” And they certainly won’t appreciate our telling commentary that’s now emerging from central banks and regulators.

The latest we-told-you-is came today in a speech from the Bank of England Deputy Governor for Financial Stability, Jon Cunliffe. He said, “since September, the FCA [UK Financial Conduct Authority] FTX warns the public that “you won’t get your money back if there are mistakes.”

And things went wrong. Central banks and other financial regulators are concerned about large crypto tools reaching the fiat financial system – the issue spreading beyond crypto.

But this year, those tentacles have been cut, cut with one tentacle, because crypto-companies and hedge funds, one after the other, have exploded and taken the funds of their customers with them. The most recent example is the spectacular implosion of FTX and its affiliated companies, including Alameda Research, which left untold chaos and huge financial holes. The debris of all this will be picked up over the next few years in bankruptcy court.

So now the question arises: Why regulate this thing? Why not let it destroy itself before it gets big enough to pose a real risk of infection? Why not allow the unrestrained and repeated massive loss of users to become a natural self-imposed regulatory force that prevents the crypto space from growing, thus perpetuating the risks of infection which is more than crypto at least?

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That sounds like a good idea to me. And that argument, after the FTX implosion, can be heard more loudly in different locations.

And even Cunliffe of the Bank of England, today in his speech about crypto, gave this theory a nod, even when he outlined why crypto must be regulated. He referred to an essay in FT Alphaville, “Let crypto burn.”

Cunliffe said in his speech:

“Of course, it is possible that none of these two reasons – investor protection and protection against the risk of financial stability – will be relevant because the instability and risk in the world of unregulated crypto finance, which is the most recently shown by FTX, is to ensure that the sector does not grow.

“Actually, some [the authors of the FT Alphaville article] argued for regulators battling the crypto world to keep it outside the regulatory framework to ensure users’ ‘caveat emptor’ concerns stifle growth and connectivity to mainstream finance.

Instead of regulation, “It’s better to do nothing, and just let crypto burn,” said the authors of the FT Alphaville article, Stephen Cecchetti (chair, international finance at Brandeis International Business School) and Kim Schoenholtz (professor emeritus at NYU’s. Stern School of Business).

They said in their essay:

“Active mediation would give undeserved legitimacy to a system that does little to support real economic activity. It would also give an official stamp of approval to a system that currently does nothing threat to financial stability and will lead to calls for public bailouts if crypto inevitably explodes again.

“Finance is about trust. The loss of confidence from the rampant failures is already leading to the death of crypto. The market capitalization of many “coins” has decreased by about 75 percent from the peak in November 2021.

I agree: let crypto burn; don’t regulate it.

Crypto came about during the Fed’s money printing and the Financial Crisis in January 2009. In the initial Bitcoin white paper, they called it a “system for trustless electronic transactions .” It turned out to be the opposite. Compared to existing transaction methods, including peer-to-peer methods that are free, easy to use, and powered by fiat currency banking systems, it is difficult and expensive to use Bitcoin for transactions. And as quick as it is, it’s also risky to use it for transactions.

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Above all of these are other risks, such as your bitcoin being swallowed by hackers or if the exchange goes to heck or if you lose the key.

So it never did what it said it could. Instead, there are already many thousands of cryptos, each of which can create their own and use it as collateral, as FTX did with its own native crypto FTT, and these cryptos are nothing but gambling tokens of a lawless high-tech casino.

And everyone who enters the casino knows this – or should know this – because the warnings have been around for years.

So just keep gambling inside the casino, block the exits, and let the casino burn itself down. And it’s just fine in that regard.

Unlike the regular financial system, this casino is not economically necessary, it has no purpose, but burns a lot of energy during the mining process. If this system goes away, the economy will continue to function well.

The public who ventured into the casino and were crushed by the falling debris, the VC investors who funded the casino and who lost their shirts in it, the hedge fund clients whose fiat money disappeared in the fire before in their eyes, well, they have been warned for years about the risks of betting on something that someone has done.

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I mean, sure it worked well for a while because everyone involved was playing an act of what I call consensual hallucination.

There is no need to regulate it. It regulates itself by the fact that many people lose a lot or all of their money. And that would prevent crypto from reaching the kind of scale that would cause a massive spread outside of crypto.

If some technologies emerge from the crypto space with useful and broader applications, then great, great. They can find a use in the highly regulated fiat financial system.

And some will just burn, no problem.

These are the stocks of some crypto-related companies that haven’t filed for bankruptcy yet: Today’s closing price, today’s percent change, and percent breakout from the top. All of these are featured in my pantheon of Imploded stocks. There’s not much to lose:

Crypto Related Stocks

Nov 21, 2022

Price $ % today % from above
Coinbase [COIN] 41.23 -8.9% -90.5%
Robinhood [HOOD] 8.85 -3.7% -89.6%
MicroStrategy [MSTR] 157.22 -7.6% -88.0%
Scientific Core [CORZ] 0.17 -6.3% -98.9%
Hive Blockchain [HIVE] 2.00 -10.7% -93.0%
TeraWulf [WULF] 0.83 -13.4% -98.0%
Marathon Digital [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, is set to new lows today:

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