Crypto is worth fixing. Regulators should start

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The once-burgeoning field of crypto and decentralized finance continues to implode, presenting policymakers with a dilemma: Should they let it burn out or step in to address its now-obvious flaws?

I’m with another group. To maintain their credibility and get the most out of blockchain technology, regulators should intervene and crack down on fraud, protect investors and ensure market integrity.

The dominoes keep falling after the collapse of the FTX empire. The latest victim, cryptolender Genesis Global Capital, is unlikely to be the last. Each failure further undermines confidence, reduces activity and revenues, and puts pressure on the rest of the industry. Without a lender of last resort to provide emergency support — as the Federal Reserve does for traditional banks — there is little to stop the rot.

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

However, such thinking ignores two important points. One is that the government usually takes steps to protect people who don’t have the ability or means to do so themselves. It seeks to ensure that prescription drugs are effective and used properly, that motor vehicles are safe, that roads are properly marked and maintained, that doctors and lawyers have the necessary qualifications, even that casinos do not do undue harm. Why should cryptocurrencies be any different?

Second, why throw the baby out with the bathwater? Making cryptocurrency investing safer would help develop technology that may still have valuable applications. Some promising areas:

• Digital identity. Under current technology, compliance with anti-money laundering and know-your-customer rules requires expensive and often redundant assessment 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 underpin new global payments “rails” that would improve slow and expensive correspondent banking.

• Securities trading. By enabling the instantaneous and simultaneous transfer of money and assets, blockchain technology could drastically reduce the risks associated with clearing and settlement.

• Property ownership. By enabling the use of digital tokens to represent ownership, blockchain could eliminate the need to secure title in real estate transactions — and could promote inclusion by making smaller investments easier and cheaper.

So why, one might reasonably ask, have these use cases not been more fully realized? New technologies can take time to result in new industries and ways of doing business, and in the early stages it is virtually unknown where they will lead. It took several decades for electricity generation to make the transition to mass production and the Model T; there was a long gap between the advent of open source software and LINUX being used in applications ranging from cloud computing to Android smartphones. Xerox’s famous Palo Alto research center produced innovations that ultimately led to the personal computer and more, although Xerox only reaped some of the benefits.

Standing idly by and letting cryptocurrency collapse is not the way to maximize the benefits of this emerging technology. Instead, legislators and regulators should do their jobs: Ensure protection of customer assets and market integrity; require that stablecoins — tokens with values ​​tied to fixed currencies — be fully backed by safe assets denominated in those currencies, such as short-term government debt and central bank reserves; work with industry to establish best practice and enforce these standards at home and abroad.

Until now, regulators have chosen errors of omission over commission, opting for inaction rather than the risk of error. The result is billions of dollars in losses and an erosion of confidence in industry and regulation. They need to be much more proactive.

More from Bloomberg Opinion:

• The cryptocurrency crash is just beginning: Lionel Laurent

• FTX plans comeback: Matt Levine

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

This column does not necessarily reflect the opinion of the editorial board or of Bloomberg LP and its owners.

Bill Dudley is a columnist for Bloomberg Opinion and a senior advisor at Bloomberg Economics. A senior research fellow at Princeton University, he was 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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