Following the collapse of FTX, calls for crypto regulation have intensified among US lawmakers. But a prominent economist argued this week, it would lend legitimacy to the crypto industry — and that, in turn, could lead to greater economic damage.
Stephen Cecchetti, economist and professor at Brandeis International Business School, pointed to the economy within World of Warcraftan online video game with millions of players.
“I think a lot of it is like a video game, so if I look at analog, World of Warcraft it has 120 million players and it has an economy inside it,” he said at a crypto debate organized by the Brookings Institution. “Fortunately, no federal financial regulator is responsible for oversight World of Warcraft. And while it’s about money, I don’t think any of us would invite them to oversee massively multiplayer online games. Like World of Warcraftcrypto, in my opinion, does not support the real economy, so legitimizing it will simply drain creative resources from productive activities.”
Creating regulations specifically for crypto, he argued, would affect how banks approach the sector.
“Legitimizing crypto will encourage banks to directly buy crypto assets and lend against them as collateral,” he said. “Imagine where we would be if leveraged financial intermediaries held cryptocurrencies in November 2021 before the crash.”
The value of cryptocurrencies has fallen dramatically since the end of last year. Bitcoin, the largest cryptocurrency, has lost more than 60% of its value this year.
If “almost all transactions in the crypto world stay within the crypto world with no links to the real economy,” Cecchetti said, then “it would be like these things are happening on Mars, and it would leave the traditional financial system unchanged. That should be our goal .”
As for the misconduct that he sees as a “defining feature of the crypto world,” prosecutors can address it by “aggressively enforcing existing laws and, where appropriate, targeting celebrities who promote these things,” he said. .
FTX founder Sam Bankman-Fried was charged with eight criminal counts, including two counts of wire fraud and six counts of conspiracy to commit securities and commodities fraud, money laundering and campaign finance violations.
‘Let crypto burn’
Calls for more regulation have heated up in recent weeks, following the epic collapse of FTX last month.
Last weekend, Senator Sherrod Brown, chairman of the Senate Banking Committee, called for more regulation and even left open the possibility of banning cryptocurrency, although he admitted that it would be “very difficult because it will go offshore and who knows how that will work.”
In a statement following Bankman-Fried’s arrest in the Bahamas, Brown said: “Things that look and act like securities, commodities or banking products must be regulated and overseen by responsible agencies that serve consumers… Crypto doesn’t get a free pass because is bright and shiny.”
But Cecchetti says it would be better to “let crypto burn,” as he and Kim Schoenholtz, a professor at NYU’s Stern School of Business, recently wrote Financial Times column.
“Following the collapse of FTX, authorities should resist the urge to create a parallel legal and regulatory framework for the crypto industry,” they wrote. “It’s far better to do nothing and just let the crypto burn.”
Actively intervening, they added, “would provide an official seal of approval for a system that does not currently pose a threat to financial stability and would lead to calls for a public bailout when the cryptocurrency inevitably erupts again.”
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