Steve H. Hanke and
Cryptocurrencies were already failing when FTX’s malfeasance came to light in November, but the company’s collapse accelerated the coming of the crypto ice age. The status quo became impossible to defend, and the consensus on how to proceed has settled on two possibilities. One sees FTX as an example of why crypto needs more regulation. The other refuses to grant crypto the halo of regulation and argues it should be left to burn.
Thanks to industry lobbying, discussions about regulation are already under way. It would likely require Securities and Exchange Commission registration for most crypto coins and exchanges and eliminate stablecoins that aren’t effectively money-market funds. This would largely clear the crypto landscape in the U.S., leaving only Bitcoin, Ethereum and stablecoins that are completely fiat-backed.
Do the benefits of crypto markets outweigh the cost of regulating them? No. But letting crypto burn wouldn’t be costless, either. The financial pretensions of crypto need to be actively dismantled. Contrary to what its marketing wizards tell us, crypto is neither money nor a vehicle for finance. It’s an elaborate simulation of finance that produces gains and losses. Users trade real money to gamble with what are essentially casino chips, but crypto isn’t even gambling. Casino odds are known, but the odds in crypto are subject to gross manipulation. Regulation might stabilize the house odds and the exchange rate for chips such as stablecoins, but it wouldn’t transform crypto into finance.
The crypto failures of 2022 would have been worse without the minimal entanglement of crypto firms with the regulated financial system. Systemic liquidity and credit crises were avoided. At the same time, the connections between a handful of so-called crypto banks and the Federal Home Loan Bank system show how easily a cryptocurrency crisis might spill over. Regulating crypto would encourage denser, deeper connections, generating systemic risks.
Letting crypto remain would allow further damage to accrue, particularly to the environment. Bitcoin’s mechanism wastes zillions of processor cycles in pointless brute-force computations that authenticate mere handfuls of transactions. These computations consume an astonishing amount of electricity and specialized hardware, straining power grids in places as far-flung as Texas, Serbia and Kazakhstan. The demand for mining hardware is large enough to threaten the semiconductor supply chains that are currently snarling auto production and undermining Taiwan’s security. Annually, Bitcoin’s computations produce more carbon emissions than 10 million cars and tens of thousands of metric tons of broken hardware. In a world paying handsomely to arrest global warming, why support a fantasy of value that undermines the goal?
Yet letting crypto burn would allow the most shameless actors to gamble on a quest for resurrection. The ease of spinning out new tokens makes an attempt to return to the tables irresistible. The disgraced author of the Terra/Luna debacle, which vaporized billions of dollars overnight in May 2022, immediately returned to the market with Terra 2.0. The disgraced founders of Three Arrows Capital, bankrupted in July 2022, now want to buy up crypto users’ bankruptcy claims, funded by—you guessed it—the proceeds of a new crypto token. And those bankruptcy claims remain in limbo only because the management of such crypto firms as Celsius, Voyager Digital, BlockFi and Genesis continue to pay themselves fat salaries in Chapter 11 bankruptcy rather than liquidate their remaining assets to repay creditors. Judges and trustees should help purge the system by pressing bankrupt crypto firms into liquidation without further delay.
Crypto is part chlorofluorocarbon, part cocaine and part bearer bond. It isn’t the future of finance. More than malign neglect, the U.S. needs policies that will eliminate cryptocurrencies and their metastases.
Mr. Hanke is a professor of applied economics at the Johns Hopkins University. Mr. Sekerke is a fellow at the Johns Hopkins Institute for Applied Economics, Global Health and the Study of Business Enterprise.
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Appeared in the March 9, 2023, print edition.