Let crypto burn | Finance times

Stephen Cecchetti is Rosen Family Chair in International Finance at Brandeis International Business School. Kim Schoenholtz is an emeritus clinical professor on the Stern School of Business of the NYU.

After the collapse of FTX, the authorities should resist the urge to create a parallel legal and regulatory framework for the crypto industry. It is much better to do nothing and just let crypto burn.

Active intervention would give a system undeserved legitimacy that does little to support real economic activities. It would also be an official seal of approval for a system that is currently not a threat to financial stability, and lead to demands for public rescue campaigns if crypto inevitably breaks out.

In finances, everything revolves around trust. The loss of trust due to increasing failures already leads to the downfall of crypto. The market capitalization of the countless “coins” has dropped by about 75 percent since its high in November 2021.

It is difficult to imagine that confidence in crypto recovers from the extent and scope of FTX's failures. Until recently, FTX was a leading stock exchange and was widely advertised as a guideline in an industry full of charlatans. However, FTX has deliberately decided to settle in jurisdiction that lies outside the legal and regulatory area of ​​responsibility of the nations with the largest financial systems.

In addition, reports now show that FTX lacked transparency, customer funds were abused, were involved in shops with connected parties, had weak corporate management and accepted phantom security and other unsafe practices.

simply said that the crypto system, as it currently exists, is not sustainable. Without clear and easily enforceable property rights, it was never safe and effective to rely exclusively on private investors in order to monitor and discipline the behavior of opaque agents. There is no view of a technological solution to these ancient problems.

The big question is whether the authorities should create a new regulation and supervisory framework, protect property rights and enforce the principles of security and solidity. Complete losses by the collapse of crypto, many people demand new rules to protect consumers.

Ironically, attempts to create a separate structure to regulate and monitor crypto, but only the financial system less, no longer, secure.

This applies to two reasons. First, the banks will encourage the banks to both buy crypto-assets and to give them as security, which makes the banking system susceptible to falling market values. In contrast, even the ongoing breakdown of crypto values ​​and institutions had practically no effect on the well -being of traditional financial markets and companies.

Secondly, new rules would lead to a migration of financial activity from the traditional financial world into the even less regulated but newly sanctioned cryptocelt. Both crypto and traditional finances are simply combinations of a database and a computer code. It would be easy for a group of technicians to convert any set of cash flows from one in the other. Imagine, for example, that someone decides to issue claims to their company as crypto tokens instead of as conventional equity in order to benefit from looser rules for disclosure, bookkeeping, custody and the like.

If new rules are required, it is those that limit the exposure of traditional foreign mediators compared to the crypto world.

banks, dealers, insurers and pension funds should not buy and hold cryptos or be allowed to accept as security. Most of the crypto is just a multiplayer online video game (like World of Warcraft). If practically all transactions within the cryptocelt remain without connections to the real economy, the process could just as well take place on Mars and leave the traditional financial world unaffected.

The overarching goal of the political decision -makers should be to keep crypto systemically irrelevant. The best way to do this is to have it imploded under the pressure of its insecure and unsolid business practices. In the meantime, the authorities should constantly point out the records that crypto is full of mistakes and fraud.

Instead of creating a new legal and regulatory framework that legitimizes crypto, we should simply burn it.