Cryptocurrencies are continuing their expansion and evolution, often outside the control of governments and banks, while regulators around the world are struggling to find ways to tame this “wild west” technology and bring it under control. In the wake of the FTX collapse and other financial scandals, tighter regulation of crypto seems inevitable, though what form that will take is currently up in the air. Related StoriesWhy Bankman-Fried’s FTX Fraud Trial Isn’t Going His Way10/18/2023Market-Making or Theft? FTX Repurposed Customers’ Money, Tech Officer Says10/9/2023 Market watchers say that much of the regulatory action has been selective and after the fact, rather than part of a coherent regulatory framework. And arbitrary regulation may constrain America’s ability to develop financial innovations and keep pace with the rest of the world. Mr. Hagerty is one of a number of legislators in both the Senate and the House who have introduced bills to regulate the crypto industry, though some bills are more restrictive than others. While the United States grapples with how to keep the crypto market in check, other jurisdictions, like the UK, Japan, Singapore and the European Union, have moved ahead, setting up regulatory regimes that will foster the crypto industry, analysts say. “The fact that the U.S. dollar is the reserve currency in the world is a huge competitive advantage for us,” Mr. Hagerty said. “Our policies to continue innovation in that arena are absolutely critical.” A Vision for Money Not Controlled by Governments or Banks The crypto market emerged in 2009 with the development of bitcoin, based on a vision that blockchain technology could create decentralized money that is not controlled by governments or Wall Street banks. It has since grown to an estimated 100 million cryptocurrency “wallets,” which are digital accounts in which individual users hold these tokens. One of the issues with developing new crypto regulations is the fact that it places the government in the role of setting down rules for a technology that was created to escape from government, both in terms of the government’s ever-expanding financial surveillance and the loss of value of fiat currencies like the dollar through inflation. Regulatory efforts have often been characterized by both a limited understanding and an antipathy towards the industry. Some in the finance world have even called for an outright ban of cryptocurrencies. Berkshire Hathaway Vice Chairman Charlie Munger wrote in a Feb. Wall Street Journal op-ed that crypto was not a currency or a commodity or a security, but merely “a gambling contract with a nearly 100% edge for the house.” China has “wisely” taken the lead in banning crypto, he said. Many other critics have asked why, given that scandals like the FTX collapse in which approximately $9 billion of customer funds went missing, the U.S. should want to have a crypto industry at all. Crypto Falls Short Crypto skeptics point out that it has fallen far short of its promise. Even bitcoin, the original and most commonly traded token, has not come close to rivaling fiat currencies like the U.S. dollar in the basic functions of money: a store of value, a medium of exchange, and a unit of account. Cryptocurrencies have been far too volatile to be a store of value. Indeed, as FTX’s token, FTT, demonstrated, many crypto currencies have had no inherent value at all. As Mr. Gensler stated in the CNBC interview, crypto exchanges have operated differently from America’s traditional stock and bond markets, for example co-mingling customers’ money in the way that FTX allowed Alameda Research, an affiliated hedge fund, to use customer funds for trading losses, debt repayment and political contributions. “We don’t see the New York Stock Exchange also operating a hedge fund,” Mr. Gensler said. The SEC also brought charges in February against Binance, the largest crypto exchange, as well as other exchanges, Genesis, Gemini, and Kraken, for offering unregistered tokens. This sparked a flood of customer withdrawals, with Binance’s token, Binance USD (BUSD) experiencing $6 billion in outflows. Down But Not Out As Mark Twain once said, upon reading his own prematurely published obituary, “the news of my death was greatly exaggerated.” And one segment of the crypto market that is perhaps the fastest growing segment is stablecoins, which promise to make payments faster and easier. Stablecoins are different from blockchain tokens like bitcoin in that they are collateralized by assets, typically some combination of U.S. dollars and Treasury bills. They could also be backed by other fiat currencies, or even commodities like gold. In theory, the value of stablecoins would remain in parity with the dollar, or whichever other currency or commodity they are linked to. While this does not offer a store-of-value any greater than the dollar, it does allow for de-centralized ownership and faster, cheaper payments than the current bank-centered system. One of the companies that has developed stablecoins is Circle, which hopes that its token will revolutionize global payment systems. Circle’s stablecoin, USD Coin (USDC), is the second largest stablecoin, with a current market cap of around $25 billion. Mr. Then says Circle has settled $11 trillion in payments since its inception five years ago, and more than $4 trillion in 2022 alone. All the various links involved in payments add time and cost to moving funds, even when using online services like Venmo, Zelle or Apple Pay, and this threatens to make America’s payments systems outdated and uncompetitive. “As the world’s systems have moved away from our system, the drawbacks to the speed and cost of our system will become more clear to the end consumer,” Ms. Schulp said. Stablecoins have a current market capitalization of about $120 billion; the dominant coin in this space, with a market cap of about $80 billion, is Tether, a Hong Kong-based issuer that conducts its business outside of the United States. Tether backs its stablecoin (USDT) primarily with U.S. Treasury bills and has become a globally significant owner of those securities. In a recent posting on X, formerly Twitter, Tether’s chief technology officer Paolo Ardoino boasted that his company’s $72.5 billion holdings of U.S. T-bills has made it the “top 22 buyer globally, above United Arab Emirates, Mexico, Australia, Spain, …” Tether also made headlines in August for its refusal to go along with demands by the U.S. Office of Foreign Assets Control (OFAC) to freeze assets held by an entity called Tornado Cash, which was on OFAC’s Designated Nationals and Blocked Persons list. U.S. Attorney Damian Williams charged that “Tornado Cash was an infamous cryptocurrency mixer that laundered more than $1 billion in criminal proceeds and violated U.S. sanctions.” There have also been allegations that crypto has been used as a means to finance global terrorism, though its defenders say that illicit or illegal use of digital tokens is only a small fraction of the crypto market. Not wanting to be left behind in the payments revolution, mainstream payment companies are also developing crypto tokens. PayPal launched a U.S. dollar-backed stablecoin, PayPal USD (PYUSD), in August, and Visa announced in September that it was expanding its ability to settle payments in stablecoin. “The shift toward digital currencies requires a stable instrument that is both digitally native and easily connected to fiat currency like the U.S. dollar,” Dan Schulman, president and CEO of PayPal, stated. Visa also lauded the efficiency of stablecoin payments. “By leveraging stablecoins like USDC and global blockchain networks like Solana and Ethereum, we’re helping to improve the speed of cross-border settlement and providing a modern option for our clients to easily send or receive funds from Visa’s treasury,” Cuy Sheffield, Head of Crypto with Visa, stated. “Visa is committed to being on the forefront of digital currency and blockchain innovation and leveraging these new technologies to help improve the way we move money.” In addition, blockchain technology is providing innovations beyond currency markets, reaching into the buying and selling of other things that people own. This could include having things like property rights and home ownership on the blockchain, allowing for a faster, digital buying and selling of physical properties and other hard assets at the individual level. Rather than trying to smother the crypto market, some say, the U.S. should find a way to create rules that would, hopefully, prevent another FTX while allowing private markets to innovate. Such rules could focus on disclosure of pertinent information to users and prohibitions on co-mingling funds. Having a clear and rational regulatory regime could also help the U.S. maintain its leading role in global finance.
Surviving a Horrible Year: Crypto Currencies Are Down but Not Out
