The author is an FT contributing editor and writes the Chartbook newsletter
In a now notorious TV commercial for the Crypto.com trading platform, Hollywood star Matt Damon intoned the following lines: “History is filled with almost. With those who almost ventured, who almost succeeded, but in the end, for them it turned out to be too much. Then there are others. Those who embrace the moment and engage. And in those moments of truth. . . they calm their minds and harden their nerves with four simple words that have been whispered by the fearless since the days of the Romans. Luck favors the brave.”
The grandiloquence was not accidental. For true believers, a technology like crypto is never just a technical fix or a get-rich-quick promise. It is something akin to a historical mission. If you buy into the vision, then Joseph Schumpeter’s notion of “creative destruction” is easily accessible, with its confident promise that out of the ruins of the old, something better will arise.
There are circumstances in which this stark view of history is appropriate, but the trillion-dollar question is which historical experiences are worth the cost and which are not. Distinguishing between the two requires being able to distinguish between things that look bold and sexy and things that actually make sense.
The Roman who is said to have first uttered the words “fortune smiles on the brave”, was Pliny the Elder, who witnessed an eruption of Vesuvius in 79 AD. Rather than do the obvious thing and take cover, Pliny ordered his flotilla to head straight for Hell in hopes of rescuing the survivors. He died amid plumes of toxic volcanic gas.
None of these fates will befall Damon, or Tom Brady and Gisele Bündchen, who endorsed FTX, the minted cryptocurrency exchange. True believers in the crypto crowd won’t be deterred by a bankruptcy or two either. It is up to US authorities not only to clean up the mess left by FTX, but to pass judgment on the crypto’s self-proclaimed historic mission. This is inevitably political.
Stopping any trendy tech project that promises to disrupt the status quo and deliver a bright new future takes decisiveness, courage, and real leadership. And there is no guarantee of success.
In the case of crypto, politics is particularly tricky. The inconvenient truth is that during the recent midterm elections, FTX’s top management was among the biggest donors to the Democratic Party. It is an overstatement to suggest that this materially affected the outcome. But try telling that to Republican Senator Josh Hawley, who seems determined to turn Sam Bankman-Fried’s actions into a cause celebre.
The Democrats didn’t just take money from FTX, either. A vocal faction in the US Congress was pushing for the legislation to set out a new regulatory regime for crypto. While banking regulators stayed away and the Securities and Exchange Congress looked askance, the Commodity Futures Trading Commission seemed eager to take on the task. He received encouragement from the highest level in the form of an executive order from President Joe Biden, who said digital assets were an area where the United States must not fall behind international competitors.
In the summer of this year, it looked like the push to recognize and regulate crypto could gain the same kind of momentum that led, in the name of modernization, to the disastrous deregulation of Wall Street in the late 1990s. .
The mess revealed at FTX should stop this bandwagon. The most drastic alternative would be to simply let the crypto burn itself out. Let Ponzi schemes crumble under their own weight. Prosecute fraud through normal prosecution channels, but provide no regulatory oversight. Make it clear to anyone interested in crypto that they do so entirely at their own risk.
Given crypto’s isolation from the rest of finance, such malicious negligence may not pose serious systemic risks, but the cost to retail investors could be serious and with it the political fallout. Letting crypto burn may no longer be realistic. If so, the urgent imperative is that regulators no longer turn a blind eye, but draw the clearest line possible. They shouldn’t just deny regulatory approval, they should ban regulated financial institutions from getting tangled up with crypto altogether. If there is going to be any regulation, it should be under the rubric of gambling, not banking. This will antagonize the crypto lobby, which will accuse regulators of wasting America’s invaluable lead in world-changing technology.
The best response to this rhetoric of historical necessity is to respond to it head-on. If it’s true, as Damon warned, that the story is “full of almost,” it’s not just down to a lack of courage or luck. Most incumbents, like most businesses, fail because they are poorly designed or come up against too strong an opposition. Blockchain may have limited uses. Crypto tokens in their most basic form will never be money. Substantially reduced, they can serve as a form of online gambling. However, they should play no role in serious finance, let alone complicated and opaque financial engineering. It is time to throw this chimera in the dustbin of history.
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