Years ago, when cryptocurrency was first making its way to the mainstream and attracting attention from governments and central banks, it was the cool libertarian kid on the block. Be it Bitcoin or Litecoin, crypto was a tool for anonymity and decentralized finance (DeFi). As a result, any discussion about regulating the sector would have been met with collective scorn and scowls. Today, in the aftermath of the collapse of FTX and virtual currency prices, the attitude toward state intervention has turned more favorable. But while a regulatory framework might seem like the solution to prevent further chaos, it would be neither effective nor libertarian.
Decentralized Cryptocurrency Exchanges
With Wall Street and institutional investors embracing cryptocurrency, the industry has been forced to mature, meaning that the sector has adopted many of the same platforms and protocols it initially attempted to escape when the first Bitcoin was issued. An example of this has been the growth in centralized exchanges (CEX) and the decline in decentralized exchanges (DEX). What is the difference?
A DEX is a digital currency exchange that lets users buy and sell crypto in direct, peer-to-peer transactions without an intermediary. A CEX has the opposite function: A single entity that acts as an intermediary to facilitate, manage, and oversee all trades. The latter has become popular because of speed, volume, liquidity, and simplicity, but a CEX has its drawbacks. The first disadvantage is that the exchange controls clients’ assets since it possesses private keys. The second concern is that centralized exchanges are prone to manipulation, whether fake volume levels or insider trading.
If any of this sounds familiar, it is because FTX operated similarly. Although it was supposed to be a more advanced web portal for sophisticated investors, the centralized nature enabled fraud, theft, and incompetence to reign supreme among ex-CEO Sam Bankman-Fried and his cohorts.
Dumb Money
Liberty Nation previously discussed the dumb money that resulted in too many pump-and-dump schemes and joke coins becoming synonymous with cryptocurrency. Indeed, with easing monetary policy and free cash traveling through the economy and financial system, crypto traders invested too much into dubious tokens, such as Dink Doink, Grimace Coin, and Shiba Inu, and projects with zero utility or fake goals, like Crypto Zoo and Save the Children.
But is this the fault of the cryptocurrency ecosystem? Hardly. For centuries, get-rich-quick-schemes have been prevalent, from the Tulip Mania of the 17th century to the 2021 meme stocks. Sure, armchair traders will have likely been caught holding the bag when selloff time came thinking that assets only go up. But this is more of a case of “buyer beware” than a fundamental challenge in crypto. If individuals’ only method of research and due diligence was listening to a Jake Paul podcast or perusing Wall Street Bets, then it is their fault if they suffered losses.
(Photo by Umit Turhan Coskun/NurPhoto via Getty Images)
In addition, if interventionists need to locate a fall guy, then look no further than the Federal Reserve. The central bank injected trillions of dollars into the system and facilitated an environment of intense speculation in the Everything Bubble marketplace. When credit is cheap, the margin is ubiquitous.
Blockchain is Superior to Regulations
But should the cryptocurrency industry be run like the Wild Wild West? First, both ideas – the Wild Wild West and crypto being free of regulations – are misnomers. Second, additional layers of regulation might create more of a risky environment anyway. Like every type of regulatory blueprint, it creates a barrier to entry. It adds to costs, forcing consumers to find centralized institutions like FTX rather than simply holding their tokens in a digital wallet. Moreover, the sector already possesses one advantage over the government: blockchain technology. Indeed, by having companies publish their reserves on a blockchain (a public ledger), they can manufacture a more transparent online world where everything is out in the open. Following the Bankman-Fried fiasco, there are calls for this to be the industry standard.
Everything Wrong with Crypto
The stories that dominated the last couple of years are everything that is wrong with how crypto has evolved (or devolved). From million-dollar non-fungible tokens (NFTs) of digital rock images to silly coins that skyrocket in value overnight, many of these recent developments might have been the antithesis of why crypto was conceived in the first place. Because of a few bad actors, the industry will now be under the microscope of the Securities and Exchange Commission (SEC) and governments worldwide. Crypto will survive and stay alive, but the dream may be dead.
