The grim ghost of crypto future

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Remember when crypto was so heavily and onerously regulated, so unnecessarily scrutinised by the authorities, that the whole market crashed in spectacular fashion as one tightly regulated crypto platform after another collapsed into oblivion?

Yeah, me neither. Because that’s not quite how it went, is it? The last time the crypto market cratered, back in 2021-22, it was not about the industry being so tightly controlled by regulators, but the opposite. It was precisely because of the lack of regulatory oversight in the so-called “crypto space” that the barons of cryptoland believed they were entitled to mess around with other people’s money as if they were playing Monopoly.

It was the huge gaps in the rules around risk-taking, leverage and transparency that were exploited and which ended up leading so many crypto projects to collapse as the market turned against them. And it was the lack of consumer protection — and understanding of risks involved — that led so many retail investors to lose their life savings (most crypto barons were safe, of course, because they knew better than to put all their money in crypto).

And yet the idea that what is needed is less regulation, that crypto has been unfairly treated, and that it should simply be accepted as a harmless part of the financial system, is the one that is now being aggressively pushed by the crypto industry and its acolytes.

“Delete CFPB. There are too many duplicative regulatory agencies,” Elon Musk — a man so painfully online that he thinks in terms of “deleting” a government agency — wrote on his X platform on Wednesday. Musk was referring to the Consumer Financial Protection Bureau, the US watchdog that seeks to protect Americans against the kind of predatory behaviour that brought about the last crypto collapse.

The world of crypto has, unsurprisingly, been in a state of elation since the election victory of Donald Trump who, having once decried the industry as a “scam”, subsequently pitched himself as the “crypto president” and promised to make America “the crypto capital of the planet”. Crypto prices climbed sharply on expectations that Trump could win and went up further when it became clear he had. Bitcoin has risen by about two-fifths since the election, hitting new all-time highs of just below $100,000. The estimated market value of all crypto — a dubious metric but the only one available — has gained more than $1tn.

Musk’s favourite “memecoin” Dogecoin, meanwhile, has eclipsed bitcoin in terms of gains, climbing 150 per cent since the election. Why? Because Doge is the acronym for the new “department of government efficiency” that Musk is due to head up. Is that just totally hilarious or deeply grim? I guess it depends on your sense of humour.

It seems Trump is going to keep his promises to cryptoland, and that the more than $100mn the crypto lobby spent on the US election — which made up almost half of all corporate spending — is paying off handsomely. Last week it was reported that Trump is consulting the crypto industry on whom he should appoint as the next chair of the Securities and Exchange Commission. (The current chair, the crypto-critical Gary Gensler, has said he will be standing down before 45 becomes 47, after Trump said at a bitcoin conference that he would fire him on day one of his presidency.)

Aside from the huge support that multibillionaire titans of the crypto industry are giving him, Trump has personal financial interests in crypto too, such as his sons’ venture World Liberty Financial.

None of this should lead us to believe in Trump’s fierce commitment to keeping his promises. But it should worry us. I have steered clear of talking about crypto as a “systemic risk” in the past because it has been so relatively small, and so disconnected from the rest of the financial system. But that is changing. Following the SEC approval of bitcoin exchange traded funds earlier this year, crypto has become far more closely connected to the rest of the financial system. And the numbers are enormous: BlackRock’s recently launched bitcoin ETF has already drawn in an astonishing $48bn.

Martin Walker, honorary research fellow at Warwick Business School and a longtime crypto critic, is worried that regulators are not able to keep up. “One thing history teaches us about financial crises is that risk always builds up and then explodes in areas the regulators never seem to expect,” he tells me. “Faultlines in the financial system are not always obvious . . . Crypto finance is so large now there are sure to be macro risks . . . that are both dangerous and little understood.”

Ironically, those who are pushing for the deregulation of crypto are the most likely to bring about its next collapse. But next time, it might not just be crypto that gets burnt.

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