Whether we like it or not, cryptocurrency is the future of global finance. The Chinese are pursuing it aggressively, seeking to dominate the marketplace and use the economic power that comes with it to follow through on a threat to create an alternative to the dollar as the global reserve currency.
Think about that when you consider why FTX, formerly the world’s second-largest cryptocurrency company, recently filed for bankruptcy protection — and when you think about whether that means it will remain a viable medium for exchanging assets around the globe.
It will, and not just for the malevolent reasons many of its detractors like to cite. Honest people engaged in totally lawful and aboveboard transactions also use and will continue to use cryptocurrency in their business dealings. Nothing about the fact that former Democratic Party mega-donor and former FTX CEO Sam Bankman-Fried may turn out to be a fraudster of exponentially greater proportion than Bernie Madoff will change that.
The controversy has already pushed other cryptocurrency assets into the red. Bitcoin, as the industry is generally known, is sitting at a multi-year low. Both large private institutional and small retail investors have likely lost millions due to the crisis of confidence in the instrument’s ability to act as a store of value that erupted following Mr. Bankman-Fried’s exposure. That’s not contributing to the health of the U.S. economy and will probably add to its woes.
That there is a crisis is understandable. Mr. Bankman-Fried lost a lot of money for a lot of people. Remember, though, a single bad actor’s demise — which it likely is and should be welcomed — does not and should not be taken as a signal the entire crypto industry is corrupt.
Cryptocurrency is still emerging as an emerging instrument. There’s room for growth in the industry. It’s far from its peak. There’s a lot to shake out, which means insolvent, poorly run companies will crash, and dishonest people may get things off the ground higher than they should. Caveat emptor. But it also means competent businesses will survive if government regulations don’t drive them out of business, adding value to the economy.
FTX’s collapse was a momentous event. It’s probably tainted by fraud, but it doesn’t discredit the idea of a decentralized global financial system many crypto advocates want. When done right, cryptocurrency and the blockchain technology that powers it is a private, secure mechanism that can facilitate every imaginable financial transaction regardless of the time of day or where you are in the world. Like the establishment of the gold standard and the invention of individual retirement accounts, it’s a revolution in finance that should lead to higher standards of living.
What is wrong, what now needs fixing, is the lack of regulatory clarity that has shackled the industry and its investors. Congress, the Securities and Exchange Commission and the Commodity Futures Trading Commission, because they couldn’t decide what to do or even figure out what “bitcoin” even is, kept the door open for con artists and hucksters to walk through. They use crypto’s potential to create great wealth out of a relatively small investment — which has been a reality for a few people — to cheat investors, spread false information, cause their downfall, and bring disrepute to an otherwise great idea.
Whenever a financial crisis hits, the instinct to overreact is strong. It also leads to unwarranted government intrusion in the marketplace. Punish SBF and FTX, not the entire crypto sector. Now that Congress is investigating, the stakes are going up. Too many people are already willing to throw the proverbial baby out with the bathwater because it’s the politically appealing and easy solution.
Consider Kansas Republican Sen. Roger Marshall getting Commodity Futures Trading Commission Chairman Rostin Behnam to admit Thursday that he “personally” viewed the emerging crypto industry as “a threat to our national security.” Yet even the senator had to admit in the midst of grilling Mr. Behnam that “as we think of the uses of digital currency, we all understand there is an upside to it” along with any problems that may arise.
It’s important to keep that in mind as the pieces of what’s left of Mr. Bankman-Fried’s cryptocurrency empire fall where they may. Congress must lead the timely production of rules for the cryptocurrency industry so that investors, consumers and businesses can have confidence they are protected from bad marketplace actors.