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By letting it burn, it won’t get big enough to cause major contagion outside of crypto.

By Wolf Richter for WOLF STREET.

The last thing the crypto community – from the Bankman-Fried-bedazzled Silicon-Valley fiat-billionaire venture-capitalists down to the true believers – will listen to is another warning from another central bank about crypto and crypto exchanges and potentially losing “all your money.” And they’re certainly not going to appreciate the we-told-you-so commentary now emerging from central banks and regulators.

The latest we-told-you-so came today in a speech from Bank of England Deputy Governor for Financial Stability, Jon Cunliffe. He said, “since September, the FCA [UK Financial Conduct Authority] has warned publically on FTX that “you are unlikely to get your money back if things go wrong.”

And things went wrong. Central banks and other financial regulators are worried about crypto’s massive and tangled tentacles reaching into the fiat finance system – the issue of contagion beyond crypto.

But this year, those tentacles have gotten chopped off, tentacle by tentacle, as crypto-companies and hedge funds, one after the other, imploded and took their customers’ funds with them. The most recent example was the spectacular implosion of FTX and its affiliated companies, including Alameda Research, leaving unspeakable chaos and huge financial holes behind. The debris of all this is going to get picked through over the next few years in bankruptcy court.

So now the question arises: Why even regulate this thing? Why not let it self-destruct on its own before it gets large enough to pose a real contagion risk? Why not allow the unfettered and repeated huge losses of those users form a natural self-inflicted regulatory force that keeps the crypto space from ever getting large, thereby keeping the risks of contagion beyond crypto to a minimum?

That sounds like a good idea to me. And that argument, following the FTX implosion, can be heard more forcefully in different locations.

And even the Bank of England’s Cunliffe, today in his speech about crypto, gave this theory a nod, even as he outlined why crypto should be regulated. He referred to an essay in FT Alphaville, “Let crypto burn.”

Cunliffe said in his speech:

“It is, of course, possible that neither of these two reasons – investor protection and protection against financial stability risk – will be relevant because the very instability and riskiness of the world of unregulated crypto finance, most recently demonstrated by FTX, will in the end ensure that the sector cannot grow.

“Indeed, some [the authors of the FT Alphaville article] have argued for regulators grappling with the crypto world to keep it outside the regulatory framework to ensure that users’ ‘caveat emptor’ concerns prevents both growth and connection with mainstream finance.”

Instead of regulation, “It is far better to do nothing, and just let crypto burn,” said the authors of the FT Alphaville article, Stephen Cecchetti (chair, international finance at Brandeis International Business School) and Kim Schoenholtz (professor emeritus at NYU’s Stern School of Business).

They said in their essay:

“Actively intervening would convey undeserved legitimacy upon a system that does little to support real economic activity. It also would provide an official seal of approval to a system that currently poses no threat to financial stability and would lead to calls for public bailouts when crypto inevitably erupts again.

“Finance is all about trust. The loss of trust from surging failures already is bringing about crypto’s demise. The market capitalisation of the myriad “coins” is down by about 75 per cent from its November 2021 peak.”

I agree: let crypto burn; don’t regulate it.

Crypto came about during the Fed’s money-printing binge and the Financial Crisis in January 2009. In the initial Bitcoin white paper, they called it a “system for electronic transactions without relying on trust.” It has turned out to be the opposite. Compared to existing transaction methods, including peer-to-peer methods that are free, easy to use, and run by the banking system in fiat currency, it’s difficult and costly to use Bitcoin for transactions. And given how volatile it is, it’s also risky to use it for transactions.

On top of all this are the other risks, such as your bitcoin just getting swallowed by hackers or when the exchange goes to heck or when you lose the key.

So it never became what it was said to become. Instead, there are now many thousands of cryptos, everyone can make up their own and use it as collateral, such as FTX did with its own native crypto FTT, and these cryptos are nothing but gambling tokens in a lawless high-tech casino.

And everyone who enters the casino knows this – or should know this – because the warnings have been around for many years.

So just keep the gambling inside the casino, block the exits, and let the casino burn down on its own. And it’s doing just fine in that respect.

Unlike the regular financial system, this casino is not needed by the economy, it serves no purpose, but burns up large amounts of energy during the mining process. If this system disappears, the economy would keep functioning just fine.

The public that ventured into the casino and that is getting crushed by falling debris, the VC investors that funded the casino and that are losing their shirts on it, the hedge fund clients whose fiat money is vanishing into flames before their eyes, well, they have been warned for years about the risks of betting on something that someone just made up.

I mean, sure it worked great for a while because everyone involved played along in an act of what I call consensual hallucination.

There is no need to regulate this. It’s self-regulating by the fact that lots of people will just lose lots or all their money. And that will keep crypto from ever reaching the kind of scale that would cause serious contagion outside of crypto.

If some technologies emerge from the crypto space that have useful and broader applications, then well, great. They will find a use in the highly regulated fiat finance system.

And the rest can just burn, no problem.

These are the stocks of some of the crypto-related companies that haven’t yet filed for bankruptcy: Today’s closing price, the percent change today, and the percent implosion from the high. All of them are featured in my pantheon of Imploded stocks. There really isn’t a whole lot left to lose:

Crypto-Related Stocks

Nov 21, 2022

Price $ % today % from high
Coinbase [COIN] 41.23 -8.9% -90.5%
Robinhood [HOOD] 8.85 -3.7% -89.6%
MicroStrategy [MSTR] 157.22 -7.6% -88.0%
Core Scientific [CORZ] 0.17 -6.3% -98.9%
Hive Blockchain [HIVE] 2.00 -10.7% -93.0%
TeraWulf [WULF] 0.83 -13.4% -98.0%
Marathon Digital [MARA] 6.19 -17.1% -92.6%
Riot Blockchain [RIOT] 3.98 -10.8% -95.0%
Hut 8 Mining [HUT] 1.12 -9.7% -93.3%

Coinbase, among others, set at new low today:

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