FTX Should Make Crypto Regulation Easy

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As the FTX crypto empire’s demise unfolds — on Twitter, in bankruptcy proceedings, in congressional hearings, and potentially in criminal court — lawmakers and regulators grapple with one question: what should they do, if anything, to civilize a market so plagued by abuse?

A few simple fixes should suffice.

For all the grief it might have caused individual investors, the FTX debacle also had its upsides. It exposed the flaws of a market that never had much to do with the underlying blockchain technology. This helped deflate the crypto bubble and weed out some of the riskier participants. He also vindicated officials who saw danger in the speculative frenzy surrounding virtual tokens with no intrinsic value.

Regulators might be tempted to sit back and hope that the crypto market will simply shut down, ending this whole bizarre episode. It would be wishful thinking. All cryptocurrencies in circulation still have a notional value of around $850 billion, and daily trading is still in the tens of billions of dollars. Officials must learn from the fiascos of 2022 – from the collapse of the stablecoin Terra to FTX – to ensure that renewed speculation never threatens the wider financial system.

Three steps in particular would be helpful.

Getting Started: Make stablecoins stable. Much like money market mutual funds, stablecoins claim to maintain a constant value in fiat currency, typically $1. Yet they are often backed by assets ranging from short-term corporate debt to nothing at all. This makes them very vulnerable to panic withdrawals – which, if they involve real-world asset sales, could disrupt the credit companies they need to fund their day-to-day operations. The fix: Banking regulators can create a limited charter for stablecoin issuers, requiring that any representation of dollars be backed by real dollars deposited with the Federal Reserve. This would ensure stability while letting issuers compete on the quality of their technology, which could prove useful in making payments cheaper and faster, especially across borders.

Then, slow down the exchanges. FTX competitors, such as Coinbase Global Inc. and Binance Holdings Ltd., still do not face the security, soundness or segregation of funds requirements imposed by traditional exchanges. This leaves them free to put clients at risk, including through proprietary trading and extreme leverage. There is no need to wait for Congress to figure out which regulators should be in charge, or to define digital tokens as securities, commodities or anything else. Instead, the Securities and Exchange Commission and the Commodity Futures Trading Commission should cooperate to establish an industry-funded supervisor – modeled on the Financial Industry Regulatory Authority – that would ensure crypto intermediaries meet the same standards. than their traditional counterparts.

Finally, maintain a firewall. Financial regulators have so far done a good job of keeping crypto out of traditional banks, which is one reason why FTX’s downfall hasn’t had wider repercussions. Whether or not they adopt specific rules, they must remain vigilant to prevent systemically important financial institutions, including non-banks, from becoming too exposed. Digital tokens may possibly have utility as representations of valuables, but on their own they have none of the actual uses or cash flows of assets such as commodities, stocks, and bonds. . Lending against them is wasting money for nothing.

—Bloomberg Review

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