Crypto is worth fixing. Regulators should move

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The once-thriving field of crypto and decentralized finance continues to implode, presenting policymakers with a dilemma: should they just let it burn or step in to fix its now-evident flaws?

I am with the second group. To maintain their credibility and get the most out of blockchain technology, regulators need to step in and crack down on scams, protect investors, and ensure market integrity.

The dominoes keep falling after the demise of the FTX empire. The latest victim, crypto lender Genesis Global Capital, is unlikely to be the last. Each failure further undermines confidence, reduces business and revenue, and puts pressure on the rest of the industry. Without a lender of last resort to provide emergency support like the Federal Reserve does for traditional banks, there is little to stop the rot.

Some think it’s very good. They argue that crypto was largely an unproductive speculative bubble that should be able to deflate on its own. Investors were amply warned, and the unregulated bank-like intermediaries they recklessly entrusted their money to had little or nothing to do with the potential of the underlying technology.

However, such thinking ignores two important points. The first is that the government usually takes action to protect people who do not have the ability or the means to do so themselves. It aims to ensure that prescription drugs are effective and correctly used, that motor vehicles are safe, that roads are properly marked and maintained, that doctors and lawyers have the necessary qualifications, even that casinos do not cause excessive damage. Why should crypto be any different?

Second, why throw the baby out with the bathwater? Making investing in crypto safer would help the development of technology that could still have valuable applications. Some promising areas:

Numeric identity. With today’s technology, anti-money laundering and know-your-customer compliance requires costly and often redundant assessment and reporting. Blockchain has the potential to make the system more efficient and strike the right balance between privacy and security.

Cross Border Payments. Blockchain could underpin new global payment rails that would improve slow and expensive correspondent banking.

Securities trading. By enabling the immediate and simultaneous transfer of money and assets, blockchain technology could significantly reduce the risks associated with clearing and settlement.

Ownership of Assets. By enabling the use of digital tokens to represent property, blockchain could eliminate the need for title insurance in real estate transactions and could promote inclusion by making small investments easier and less expensive.

So why, one might reasonably ask, haven’t these use cases been more fully realized? New technologies can take time to translate into new industries and new ways of doing business, and at first it’s nearly impossible to know where they will lead. It took several decades for electricity generation to allow the transition to mass production and the Model T; there has been a long lag between the advent of open source software and the use of LINUX in applications ranging from cloud computing to Android smartphones. Xerox’s famed Palo Alto Research Center produced innovations that ultimately led to the personal computer and much more, though Xerox reaped little benefit from it.

Sitting idly by and letting the crypto crash is no way to maximize the benefits of this fledgling technology. Instead, legislators and regulators should do their job: ensure that client assets are protected and markets have integrity; require stablecoins whose values ​​are pegged to fiat currencies to be fully backed by safe assets denominated in those currencies, such as short-term sovereign debt and central bank reserves; work with industry to establish best practices and apply these standards nationally and internationally.

So far, regulators have preferred errors of omission to commission, opting for inaction rather than risking errors. The result is billions of dollars in losses and an erosion of confidence in both industry and regulation. They need to be much more proactive.

More from Bloomberg Opinion:

TheCryptoCrackdown is just getting started: Lionel Laurent

FTX plans a comeback: Matt Levine

Will cryptocurrencies ever be a safe investment? :Andy Mukherjee

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Bill Dudley is a Bloomberg Opinion columnist and senior advisor to Bloomberg Economics. A senior researcher at Princeton University, he was president of the Federal Reserve Bank of New York and vice-chairman of the Federal Open Market Committee.

More stories like this are available at bloomberg.com/opinion

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