The dominoes keep falling after the demise of the FTX empire. The latest casualty, crypto lender Genesis Global Capital, is unlikely to be the last. Each failure further undermines confidence, reduces activity and revenue, and puts pressure on the rest of the industry. With no lender of last resort to provide emergency support — as the Federal Reserve does for traditional banks — there is little to stop the rot.
Some think it’s just fine. They argue that crypto has largely been an unproductive speculative bubble that should be allowed to deflate on its own. Investors were thoroughly warned, and the unregulated, bank-like intermediaries to whom they unwisely entrusted their money had little or nothing to do with the potential of the underlying technology.
Yet such thinking ignores two important points. One is that the government typically takes steps to protect people who do not have the ability or means to do so themselves. It seeks to ensure that prescription drugs are efficiently and properly deployed, that motor vehicles are safe, that roads are properly signed and maintained, that doctors and lawyers have the necessary qualifications, even that casinos do not cause undue harm. Why should crypto be any different?
Second, why throw the baby out with the bathwater? Making investing in crypto safer will aid the development of a technology that may still have valuable applications. Some promising areas:
• Digital identity. Under current technology, compliance with anti-money laundering and know-your-customer rules requires expensive and often redundant evaluation and reporting. Blockchain has the potential to make the system more efficient, and to strike the appropriate balance between privacy and security.
• Cross-border payments. Blockchain can support new global payments “railings” that will improve on slow and expensive correspondent banking.
• Securities trading. By allowing money and assets to be transferred instantly and simultaneously, blockchain technology can drastically reduce the risks associated with clearing and settlement.
• Asset ownership. By enabling the use of digital tokens to represent ownership, blockchain could eliminate the need for title insurance in real estate transactions — and could promote inclusion by making smaller investments easier and cheaper.
So why, one might reasonably ask, are these use cases not more fully realized? New technologies can take time to spawn new industries and ways of doing business, and in the early stages it is virtually unknowable where they will lead. It took several decades for electricity generation to make the shift to mass production and the Model T possible; there was a long lag between the advent of open source software and LINUX being used in applications ranging from cloud computing to Android smartphones. Xerox’s famous Palo Alto research center produced innovations that eventually brought about the personal computer and much more, even though Xerox reaped few of the benefits.
Standing idle and letting crypto crash is no way to maximize the benefits of this emerging technology. Instead, lawmakers and regulators must do their job: Ensure client assets are protected and that markets have integrity; require stablecoins – tokens with values tied to fiat currencies – to be fully backed by safe assets denominated in those currencies, such as short-term sovereign debt and central bank reserves; working with the industry to establish best practices, and enforce those standards both locally and internationally.
So far, regulators have chosen errors of omission over commission, rather than risk mistakes. The result is many billions of dollars in losses, and an erosion of confidence in both the industry and regulation. They need to be much more proactive.
More from Bloomberg Opinion:
• The crypto crackdown is just beginning: 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 editors or Bloomberg LP and its owners.
Bill Dudley is a Bloomberg Opinion columnist and senior advisor to Bloomberg Economics. A senior research scholar at Princeton University, he served as president of the Federal Reserve Bank of New York and as vice chairman of the Federal Open Market Committee.
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