When my dog spots a fox in the garden, he immediately stands to attention and growls softly at the glass door, curly tail vibrating with irritation at this incursion into his territory. He is sure going to show that fox who is boss. Any minute now.
London’s foxes are a fearless bunch that can handle a fight, and when they spot him squeaking at them from his comfy indoor world, they pay him no heed. It is only when they decide to leave the garden of their own accord that our pampered pooch starts barking furiously to be let out and barrels outside to demonstrate his dominance, safe in the knowledge that the abrasive wild foe has already hopped over the fence.
And so it is with crypto. For years, financial regulators and central banks have whimpered from behind their glass doors at the crypto industry. These tokens, they have repeatedly said, have no intrinsic value. Anyone buying them should be fully prepared to lose everything without any recourse. The warnings have done little to dent the industry.
Now, though, the barking is suddenly louder, more urgent and more assertive. Since the implosion of FTX, one of the biggest and supposedly one of the more reliable exchanges, authorities have cranked up the volume on their warnings.
“Finally, there are more people blowing the bullshit whistle,” Senator Elizabeth Warren told news outlet Semafor in an awkwardly worded but nonetheless impactful turn of phrase.
Other heavyweights have piled in. US Treasury secretary Janet Yellen has described crypto as “an industry that really needs to have adequate regulation. And it doesn’t.”
The thing is, regulators have spent so long getting to this point that some have come around to the view they should not bother properly regulating the stuff after all.
That was the view articulated late last month by the European Central Bank. In an unusually punchy blog post entitled ‘Bitcoin’s last stand‘, the ECB dunked on the crypto industry from a height. Stability in the price of bitcoin — the biggest token around — is “an artificially induced last gasp before the road to irrelevance”, wrote director-general Ulrich Bindseil and adviser Jurgen Schaaf. It is “rarely used for legal transactions”, it is “cumbersome, slow and expensive” and it is an “unprecedented polluter”. You get the idea, and you can imagine the feedback this has received from the crypto true believers.
But regulation, they added, “can be misunderstood as approval”. This is a good point: It can give the impression that crypto tokens are just like stocks, bonds or other regulated investment products.
This feeds in to the argument that some have made to just let crypto burn. Already, we have seen how unsuspecting punters can be drawn in to something that looks like a professional trading venue. Plastering regulators’ logos on these sites could very well bolster the impression of official oversight.
This is not the only reason to let crypto wither and die on its own. Others are that the turmoil in the crypto industry has left the rest of the financial system unscathed. What’s more, determined buyers of crypto often simply use VPN connections to the internet to skirt national rules, making some elements of regulation a waste of time.
But the timing here is awkward. As the ECB blog notes, the EU’s Markets in Crypto-Assets Regulation, or MiCA, is finally slowly coming to life. At a recent FT event, I asked Verena Ross, chair of the European Securities and Markets Authority, which is leading this effort, whether it was worth the bother.
Perhaps inevitably, she said yes. Boundaries between traditional finance and crypto are “blurring”, she said. Crypto tokens are listed on the same trading platforms as tokens with purported links to regulated stocks, for instance. “Therefore closing your eyes and saying that should stay in the speculative field and it’s a casino that no one wants to enter, I think may be a bit short sighted,” she said.
Ross is acknowledging here that in the gap between regulators’ tails starting to twitch and rulemakers finally running out to assert their authority, these tokens have become known as assets. Betting on them is known as investing. Collections of tokens are known as portfolios. Crypto has entered the lexicon of mainstream investing without the rules and oversight that entails.
It is perfectly reasonable for amateur investors to think they are dabbling in something with some degree of protection and oversight. Where are the high-profile public awareness campaigns telling them that is not the case? Where are the warnings of addiction and of the high rate of losses that you see on authorised spread betting sites?
It is tempting to grab some popcorn and just watch crypto implode, especially to avoid having regulators appear to give a stamp of approval on something they will never be able fully to control. Even if the world does opt for proper global regulation, that could still take years to formulate and roll out. But unsuspecting punters do not deserve to be the collateral damage here. Better public warnings have to be part of the solution.