Crypto is like World of Warcraft’s economy and legitimizing it with regulations would hurt the financial system, economist says

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In the wake of FTX’s collapse, calls to regulate crypto grew among US lawmakers. But that would lend legitimacy to the crypto industry, a prominent economist said this week, and that in turn could lead to wider economic damage.

Stephen Cecchetti, economist and professor at Brandeis International Business School, pointed to the economics of World of Warcraft, an online video game with millions of players.

“I think the strongest argument against regulation is to confer legitimacy,” he said during a crypto panel hosted by the Brookings Institution.

“I think a lot of these things look like a video game, and so if I look at an analog, World of Warcraft has 120 million players, and there’s an economy in there,” he continued. , no Federal Financial Regulator is in charge of overseeing World of Warcraft And while there’s money involved, I don’t think any of us would call on them to oversee massive multiplayer games in Like World of Warcraft, crypto, in my view, does nothing to support the real economy, so legitimizing it will simply drain creative resources from productive pursuits.”

Crypto regulation

Creating regulations specifically for crypto, he argued, would affect how banks approach the sector.

Legitimizing crypto will encourage banks to directly buy crypto-assets and lend them as collateral, he said. Imagine where we would be if leveraged financial intermediaries held crypto in November 2021 before the drop in value.

Cryptocurrencies have fallen dramatically since late last year. Bitcoin, the largest cryptocurrency, has lost over 60% of its value this year.

If virtually all transactions in the crypto world remain inside the crypto world with no ties to the real economy,” Cecchetti said, then it would be like all of this happening on Mars, and that would leave the traditional financial system unchanged. This should be our goal.

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As for industry misconduct, a defining feature of the crypto world, in his view, prosecutors can address it by aggressively enforcing existing laws and, where appropriate, prosecuting celebrities who promote crypto. this stuff, he said.

FTX founder Sam Bankman-Fried has been charged with eight counts, including two counts of wire fraud and six counts of conspiracy relating to securities and commodities fraud, money laundering and violations of campaign finance laws.

‘Let crypto burn’

Calls for greater regulation have gained momentum in recent weeks after the epic collapse of FTX.

Last weekend, Senator Sherrod Brown, Chairman of the Senate Banking Committee, called for more regulation and left open the possibility of banning crypto, although he acknowledged that it would be very difficult as he will go abroad and who knows how it will work.

In a statement following the arrest of Bankman-Fried in the Bahamas, Brown said: Things that look and behave like securities, commodities or banking products must be regulated and supervised by responsible agencies that serve the consumersCrypto doesn’t get a free pass because its bright and shiny.

Cecchetti thinks a good approach would be to let crypto burn, as he and NYUs Stern School of Business professor Kim Schoenholtz wrote in a recent Financial Times column.

In the aftermath of FTX’s collapse, authorities should resist the urge to create a parallel legal and regulatory framework for the crypto industry, they wrote. It is far better to do nothing and let the crypto burn.

Actively intervening, they added, would provide an official stamp of approval for a system that currently poses no threat to financial stability and lead to calls for public bailouts when crypto inevitably breaks out again.

This story was originally featured on Fortune.com

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