Following the collapse of FTX, calls for regulation of crypto have increased among US lawmakers. However, a prominent economist argued this week that doing so would bring legitimacy to the crypto industry — and that, in turn, could lead to wider economic damage.
Stephen Cecchetti, an economist and professor at Brandeis International Business School, referred to the economy in World of Warcraft, an online video game with millions of players.
“I think a lot of these things are like a video game, and when I look at an analog, World of Warcraft has 120 million players and it has an economy in it,” he said at a crypto debate hosted by the Brookings Institution. “Fortunately, no federal financial regulator is responsible for overseeing World of Warcraft. And while money is at stake, I don’t think any of us would call them to monitor online massive multiplayer games. Like World of Warcraft, I think crypto doesn’t help support the real economy, so legitimacy will simply divert creative resources from productive activities.”
Crypto Regulations
He argued that creating regulations specifically for crypto would affect the way banks approach the sector.
“Legitimizing crypto will encourage banks to buy crypto assets directly and lend them as collateral against them,” he said. “Imagine where we would be if leveraged financial intermediaries held crypto in November 2021 prior to the fall in value.”
Cryptocurrencies have dramatically lost value since the end of last year. Bitcoin, the largest cryptocurrency, has lost more than 60% of its value this year.
If “virtually all transactions in the crypto world remain within the crypto world with no ties to the real economy,” Cecchetti said, then “it would be like these things happening on Mars and it would leave the traditional financial system unaffected. That should be our goal.”
As for wrongdoing, which he believes is the “defining feature of the crypto world,” prosecutors can address it by “aggressively enforcing existing laws and, where appropriate, going after the celebrities promoting this stuff,” he said.
FTX founder Sam Bankman-Fried has been charged with eight felonies, including two counts of wire fraud and six counts of conspiracy related to securities and commodity fraud, money laundering and violations of campaign finance laws.
“Let Crypto Burn”
Calls for more regulation have gathered momentum in recent weeks after FTX’s epic collapse last month.
Last weekend, Sen. Sherrod Brown, chairman of the Senate Banking Committee, called for more regulation and even left open the possibility of banning crypto, although he conceded it would be “very difficult” because it will go overseas and who knows how that will work.”
In a statement following Bankman-Fried’s arrest in the Bahamas, Brown said, “Things that look and behave like securities, commodities or banking products need to be regulated and overseen by the proper authorities that serve consumers…Crypto gets it.” not a free pass because it’s 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, wrote in a recent 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 crypto burn.”
Active intervention, they added, would “give an official seal of approval to a system that currently poses no threat to financial stability and lead to calls for public bailouts if crypto inevitably breaks out again.”
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