The crypto party seems to be getting restarted. Bitcoin is surging and big players are celebrating amid expectations that President-elect Donald Trump will make the US, as he put it, “the crypto capital of the world.”
Lest this experiment go awry, regulators need to keep some guardrails in place.
In its current incarnation, crypto has at best an indirect potential to benefit society. Most of its enterprises — such as the Trump-promoted World Liberty Financial — have little or nothing to do with the technology’s capacity to, say, improve cross-border payments or securities settlement. The most popular digital tokens tend to be purely speculative instruments, with no connection to the real-world cash flows from which financial assets derive their value. They’re traded on platforms rife with scammers, manipulation and conflicts of interest, enriching primarily the kind of intermediaries that crypto was supposed to eliminate.
Under President Joe Biden, the Securities and Exchange Commission has sought to shut crypto down rather than introduce rules to accommodate and civilize it (as Europe, for example, is attempting). SEC Chair Gary Gensler sued two of the world’s largest trading platforms, Binance Holdings Ltd. and Coinbase Global Inc., for various violations of securities laws — an effort that, if successful, could’ve forced them out of the country or even out of business.
Things have changed. Trump has pledged to fire Gensler and even establish a “strategic national Bitcoin stockpile,” to the delight of crypto advocates who pumped more than $200 million into his campaign and those of dozens of successful congressional candidates. Industry-sponsored legislation would largely neutralize the SEC, facilitating a proliferation of issuance and trading with minimal oversight — particularly given the president-elect’s likely appointments to the relevant regulators. In the 10 days following Trump’s election, Bitcoin jumped more than 30%. Dogecoin, created as a joke, nearly doubled.
Without being alarmist or unduly meddlesome, it’s worth pondering some of the ways in which things could go wrong.
What becomes of Trump’s Bitcoin reserve idea remains to be seen: It might be limited to tokens the government has already confiscated in criminal cases and hence not much to worry about. Likewise, if crypto remains a realm of rip-offs, self-dealing and zero-sum speculation, the victims will mainly be people who have been amply warned and should’ve known better, as happened with the implosion of FTX in 2022.
Unfortunately, that’s not all. If traditional financial institutions are allowed to lend against the collateral of tokens conjured out of thin air, trouble in crypto could well spread. If issuers of so-called stablecoins — tokens purporting to represent dollars and other currencies — amass enough traditional assets, a crypto panic could destabilize financial markets. And if stablecoins keep acting as uncontrolled conduits for moving money, the U.S.’s ability to fight terrorism and impose sanctions could be significantly weakened. Hundreds of billions of dollars a month move in and out of Tether, the most popular stablecoin.
Authorities need to stay alert. Financial regulators have so far done a good job of limiting lending against crypto, particularly by banks. They should keep it up. The Treasury Department has ample power to influence stablecoin issuers, which can’t function properly without access to dollars. It should demand that they assiduously police transactions, report suspicious activity and freeze holdings when necessary. And their investments should be limited to the safest, most liquid securities.
Crypto is poised for a comeback. Basic firewalls can at least prevent it from posing a threat to the millions of people who reasonably want nothing to do with it. Beyond that, buyer beware.
