Thanks to FTX, regulating crypto should be easy

By The Editors.As the demise of the FTX crypto empire unfolds — on Twitter, in bankruptcy proceedings, in congressional hearings and potentially in criminal court — lawmakers and regulators are grappling with a question: What, if anything, should they do to civilize a market so rife with abuse?.A few simple fixes should suffice..___STEADY_PAYWALL___.For all the grief it might have given individual investors, the FTX debacle has also had benefits. It exposed the flaws of a market that never had much to do with the underlying blockchain technology. It helped deflate the crypto bubble and eliminate some of the riskiest participants. It also vindicated officials who saw peril in the speculative frenzy surrounding virtual tokens with no intrinsic value..Regulators might be tempted to sit back and hope the crypto market will simply burn out, putting an end to the whole bizarre episode. That would be wishful thinking. All cryptocurrencies outstanding still have a notional value of about $850 billion, and daily trading remains in the tens of billions of dollars. Officials need to act on the lessons of 2022's fiascos — from the collapse of the Terra stablecoin to FTX — to ensure that renewed speculation never threatens the broader financial system..Three steps in particular would help..As a start: Make stablecoins stable. Much like money-market mutual funds, stablecoins purport to maintain a constant value in fiat currency, typically $1. Yet they're often backed by assets ranging from short-term corporate debt to nothing at all. This makes them highly vulnerable to panic withdrawals — which, if they entail sales of assets in the real world, could disrupt the credit companies need to fund their everyday operations. The solution: Bank regulators can create a limited charter for stablecoin issuers, requiring that any representations of dollars be backed by real dollars deposited at the Federal Reserve. This would ensure stability while leaving issuers to compete on the quality of their technology, which could yet prove useful in making payments cheaper and faster, particularly across borders..Next, rein in exchanges. FTX's competitors, such as Coinbase Global Inc. and Binance Holdings Ltd., still don't face the requirements on safety, soundness or segregation of funds that traditional exchanges do. This leaves them free to put customers at risk, including through proprietary trading and extreme leverage. There's no need to wait for Congress to determine which regulators should be in charge, or to define digital tokens as securities, commodities or something else. Instead, the Securities and Exchange Commission and the Commodity Futures Trading Commission should cooperate to set up an industry-funded overseer — along the lines of the Financial Industry Regulatory Authority — that would ensure crypto intermediaries meet the same standards as their traditional counterparts..Finally, maintain a firewall. Financial regulators have so far done a good job of keeping crypto out of traditional banks, which is one reason FTX's downfall didn't have broader repercussions. Whether or not they go on to adopt specific rules, they should remain vigilant, to prevent systemically important financial institutions — including nonbanks — from getting too exposed. Digital tokens may eventually have utility as representations of valuable things, but on their own they have none of the real-world uses or cash flows of assets such as commodities, stocks and bonds. Lending against them is throwing good money at nothing..Some worry that any regulation would unduly legitimize crypto. That needn't be the case. On the contrary, clear rules would provide authorities with the framework they need to crack down on noncompliant actors — a category into which FTX, for example, certainly would have fallen. Beyond that, officials should make it abundantly clear that regulation does not imply endorsement — any more than it did with, say, SPACs or meme stocks. Blockchain may yet have promise, but that doesn't mean the value of cryptocurrencies as we know them won't go to zero..Read more:.Jaltech offers free crypto custody services to protect investorsAvoiding crypto's landmines: How to beat scammers – and play fair with the taxmanFTX fraud highlights Bitcoin's greatness, 'Shitcoins' not – Stafford Masie on Crypto Chaos .© 2022 Bloomberg L.P.

Thanks to FTX, regulating crypto should be easy

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