In the aftermath of the FTX collapse, crypto investors and other parties involved in the industry are demanding for clear regulatory frameworks to protect consumers and make crypto firms accountable for the irregularities. People fear that the lack of clear regulation will keep the door open for similar incidents in the future.
However, Brandeis professor Stephen Cecchetti thinks totally opposite. In a recent FT article, Brandeis suggests that It is far better (for regulators) to do nothing, and just let crypto burn.
Stephen G. Cecchetti is the Rosen Chair in International Finance at the Brandeis International Business School, Vice Chair of the Advisory Scientific Committee of the European Systemic Risk Board, a Research Associate of National Bureau of Economic Research, and a Research Fellow of the Centre for Economic Policy Research.
In a related interview with CNBC Stephen, said: “My view is that allow it to implode under the pressure of unsafe business practices and unsound business practices and the fact that it really just doesn’t doesn’t create any real economic value or use.”
He thinks that a seperate regulation for the crypto industry would ‘convey legitimacy on the system’.
“I don’t think that the system is doing anything to support the real economy and by providing a seal of approval to that activity what they’re going to end up doing is taking some responsibility for it and people are going to hold the government responsible and they’ll be calls for public bailouts the next time this inevitably happens,” points Stephen Cecchetti on why he suggests crypto should not be regulated.
Commenting on how the traditional financial markets and the banking system have behaved through this really boom and bust in crypto, he said, “It’s hard to see them at this point.”
“The banks themselves don’t seem banks per se which are the ones we worry those are the institutions we worry about the most don’t seem to have exposure to this and so far as we can tell there have been a number of surveys done and supervisors do have information about this,” states Stephen. “Banks are neither holding crypto nor are they making loans that are collateralized by crypto.”
He then points out to the extreme volatility of the crypto market. “keep in mind that the crypto economy as the whole ecosystem has fallen in apparent market capitalization from about $3 trillion a year ago to something closer to $800 billion today,” Stephen said.
“And if we take out the rise in stablecoins which are actually backed by assets and the real economy things like bonds and bank accounts and the like that’s what’s backing say USD coin (USDC) issued by circle then the decline has not been two-thirds but probably closer to three quarters,” he added.
Stephen says this is huge decline and it’s been a yawn elsewhere my view of this is it’s an awful lot like a big video game.
Stephen belives that crypto is largely ‘isolated’. And, according to him, the worst thing that could happen would be that we would allow it to become connected to banks.
“One of the things that regulation would do is it would allow banks and other regulated financial intermediaries to get involved in this system and that really worries me,” Stephen said.
So, Stephen suggests the regulators to discourage investors to get involved in crypto by not making regulation and giving investors a sense that it’s ‘unsafe’.
Indian government seems to be working on the same lines. Earlier this year, the finance minister announced flat 30% tax on income from crypto. A flat tax of 30% coupled with no set off for losses was a clear indication that the Indian government wanted to discourage small investors get involved in crypto.
The trading volume on top Indian crypto exchanges declined as high as 70% in the first 10 days of the new crypto tax rule came into effect on April 1.
Stephen has made some valid points to support his argue. However, It may not be practically possible for a number of reasons. Let’s check a few.
First, we need to understand that FTX collapse was not the fault of crypto. Second, crypto industry is a crucial part of web3, which includes – metaverse, NFTs, GameFi, and more. All these concepts are now being explored and even adopted by many industries. Last, but not the least, crypto certainly creates economic value (opposite to what Stephen Cecchetti thinks).
According to a recent study by The World Economic Forum’s Digital Currency Governance Consortium, cryptocurrencies and stablecoins could be potential drivers of financial stability, equity, innovation, and market incentives for environmental sustainability. The report concludes that allowing cryptocurrencies and stablecoins to play a regulated role in economies will have a major macroeconomic net benefit.
Yes, I totally agree that there is a problem, and that needs to be fixed. And, it will require a collaborative approach by crypto and blockchain industry, and the global regulators.