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Analysis | Crypto is worth fixing. Regulators need to get moving


The once-burgeoning realm of crypto and decentralized finance continues to implode, leaving policymakers with a dilemma: should they just let it burn or step in to address its now-obvious flaws?

I’m in the second group. To maintain their credibility and get the most out of blockchain technology, regulators must step in and crack down on scams, protect investors and ensure market integrity.

The dominoes continue to fall after the demise of the FTX empire. The latest victim, cryptocurrency lender Genesis Global Capital, is unlikely to be the last. Any failure further undermines confidence, reduces activity and revenue, and puts pressure on the rest of the industry. Without a lender of last resort to provide emergency relief – as the Federal Reserve does for traditional banks – there is little to stop the rot.

Some think that’s fine. They argue that crypto was largely an unproductive speculative bubble that should deflate on its own. Investors were amply warned, and the unregulated bank-like intermediaries they unwisely entrusted their money to had little or nothing to do with the potential of the underlying technology.

Yet such thinking misses two important points. One is that governments typically take measures to protect people who don’t have the ability or resources to do so themselves. It tries to ensure that prescription drugs are effective and used correctly, that motor vehicles are safe, that roads are properly marked and maintained, that doctors and lawyers are properly qualified, even that casinos do not cause excessive damage. Why should crypto be any different?

Second, why throw the baby out with the bathwater? Making cryptocurrency investments more secure would help the development of a technology that may still have valuable applications. Some promising areas:

• Digital identity. Under current technology, meeting anti-money laundering and know-your-customer compliance requires costly and often unnecessary evaluation and reporting. Blockchain has the potential to make the system more efficient and strike the right balance between privacy and security.

• Cross-border payments. Blockchain could support new global payment rails that would improve slow and costly correspondent banking.

• Securities trading. By allowing money and assets to be transferred instantly and simultaneously, blockchain technology can dramatically reduce the risks associated with clearing and settlement.

• Ownership of assets. By enabling the use of digital tokens to represent ownership, blockchain can eliminate the need for property insurance in real estate transactions – and promote inclusion by making smaller investments easier and cheaper.

So why, one might reasonably ask, have these use cases not been more fully realized? It can take time for new technologies to result in new industries and ways of doing business, and in the early stages it is virtually unpredictable where they will lead. It took decades for electricity generation to facilitate the shift to mass production and the Model T; there was a long lag between the advent of open-source software and the adoption of LINUX in applications ranging from cloud computing to Android smartphones. Xerox’s famed Palo Alto Research Center produced innovations that eventually led to the personal computer and much more, even though Xerox reaped few of them.

Sitting idly by and allowing crypto to collapse is no way to maximize the benefits of this nascent technology. Instead, legislators and regulators must do their job: ensure that clients’ assets are protected and markets have integrity; require stablecoins — tokens with values ​​pegged to fiat currencies — to be fully backed by safe assets denominated in that currency, such as short-term government debt and central bank reserves; work with industry to establish best practices and enforce these standards both nationally and internationally.

Until now, regulators have chosen errors of omission over commission, choosing inaction rather than risking error. The result is a multi-billion dollar loss and an erosion of confidence in both industry and regulation. They need to be much more proactive.

More from Bloomberg’s opinion:

• The crackdown on crypto has just begun: Lionel Laurent

• FTX plans a comeback: Matt Levine

• Will cryptocurrencies ever be a safe investment?: Andy Mukherjee

This column does not necessarily reflect the views of the editors or Bloomberg LP and its owners.

Bill Dudley is a Bloomberg Opinion columnist and senior advisor to Bloomberg Economics. As a senior researcher at Princeton University, he served as president of the Federal Reserve Bank of New York and vice chairman of the Federal Open Market Committee.

More stories like this are available at bloomberg.com/opinion

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