Each day seems to produce another instance of bewilderment as to how on earth there has not been any coherent effort by Congress, the Securities Exchange Commission or relevant federal agencies like the Commodities Futures Trading Commission to create a regulatory framework for cryptocurrency. As Aristotle noted nearly two millennia ago: Nature operates to fill up a space that is left empty; likewise in financial markets, a vacuum created by a lack of regulation and oversight will cause a race of financial activity to fill that vacuum. And this is precisely what we have seen over the last several years in the area of cryptocurrency.
But now with the disastrous implosion of the crypto exchange FTX and its bankruptcy filing, it merits asking again — what is going on with this lack of regulation? How is it that China, the world’s second largest economy, has already developed a framework outlawing cryptocurrency trading and mining, while creating its own digital currency and allowing blockchain and nonfungible tokens (NFTs), and yet we have done nothing? China judged the industry too great a threat financially and environmentally to be allowed to grow unregulated, yet the U.S. has not even gotten to square one in any effort to meaningfully grapple with the relative costs and benefits (if any) of crypto.
How is this possible? The answer is a relatively old school explanation: good old-fashioned regulatory capture.
Few of us have been aware of a backroom onslaught of money and lobbying activity from venture capital investors and other crypto industry heavyweights seeking to preserve the vacuum of oversight for as long as possible. Their strategy was fairly straightforward: hope that the resulting rush in crypto activity will make its legalization a fait accompli.
In other words, the strategy of these venture capital (VC) investors and other industry players is simply to run out the clock as long as possible and fill the vacuum with crypto developments. All the while, they are betting the public may simply assume that our government has passed judgment on the merits and best way to manage crypto activity. But nothing could be further from the truth. This stalling tactic must be met at once with thorough and informed legislative and rulemaking processes examining the costs and benefits associated with cryptocurrencies in order to protect ordinary citizens, our economy, financial institutions and our environment.
Given crypto’s murky origins and original anarchic intended purpose, one would ordinarily think our elected officials and the stewards of our preeminent federal institutions charged with protecting our world-leading economy would have long ago jumped into action. Instead it has been nothing but crickets. If Mark Zuckerberg’s motto, “Move fast and break things,” has taught us anything, it is do not trust the folks in Silicon Valley to necessarily have our society’s best interests at heart. Indeed, the moment tech entrepreneurs and VC investors started talking about crypto or Web.3 in sweeping utopian terms was the moment to sound the alarm. Now the need to get a handle on this Crypto Wild West is at Defcon 3.
I am not prescribing how crypto should be regulated; rather, the point is that all options should be on the table as Congress and the relevant federal agencies do their darn jobs, away from corrupting industry pressures. And doing their jobs means actually weighing the real-world costs and risks of crypto, which include facilitating money-laundering, serious cyber threats, such as hacking and ransomware, funding terrorism, the massive risks of fraud and financial speculative mania as evidenced in the FTX saga, the environmental impact of crypto mining, and the potential to undermine the U.S. dollar’s role as the reserve currency of the world.
Against all these risks and costs should be weighed any real benefits afforded by crypto, stripped of the hype. And based on these costs and benefits, a real enforceable regulatory regime should be put in place. It is past time.
— James Shifren, a longtime resident of Edgemont, is president of Buckland Partners and the founder of Dunedain Ventures.
