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One of the fallouts from the Federal Reserve’s period of monetary expansion during the 2020-2021 period may be connected with the regulation of cryptoassets.
The pricing of cryptoassets had been very uninteresting until the Federal Reserve started to flood the banking system with liquidity.
This was true of what was going on in many other financial markets.
Well, the Fed saved the economy, at that time, from any serious economic catastrophe, but it generated many, many financial bubbles that it is now having to deal with as the Fed reverses its actions.
As the Fed moves to tighten up on its monetary policy so as to fight the current rise of inflation, one by one, we are finding adjustments taking place in the economy to deal with the monetary buildup that took place in various sectors of the financial world.
And, we are finding outcomes that make many uncomfortable.
The initial surge of support for cryptoassets that came from libertarian-thinking individuals has now receded somewhat.
More and more, as evidence grows of misuse or misapplication of the free-market program, we find the other side of the argument taking up more aggressive positions.
For example, columnist Greg Ip, of the Wall Street Journal, writes this morning about how “Crypto Meltdown Exposes Hollowness of its Libertarian Promise.”
Mr. Ip writes,
“unable to displace the dollar, crypto became just another asset without traditional markets’ guardrails.”
Furthermore, the lead editorial in the Financial Times, written by Jemima Kelly, claims, in bold letters, “There is a moral case against crypto.”
Ms. Kelly writes,
“it seems more appropriate to use the latest market crash as an opportunity to make the moral argument against crypto. Because it’s not just that we should not treat it as a serious asset class; we also need to stop imagining that it is just all a bit of harmless fun.”
So, some of the weaknesses of the Libertarian case have come to light.
But, we should not overreact and move too far in the opposite direction.
Yes, crypto markets have lost more than $1.0 trillion of value over the past six months.
The price of one Bitcoin (BTC-USD) was just over $67,000 on November 10, 2021.
Today, the price is right around $30,000, where it was below $26,000 several days ago.
TerraUSD (UST-USD), a token whose price was supposed to remain pegged to the dollar, suddenly dropped, along with the coin (LUNA-USD) that was meant to back it.
We have not fully experienced the full fallout of the recent collapse and await the further ramifications of the unregulated space.
Is The Regulation Coming?
Gary Gensler, Chairman of the Securities and Exchange Commission has seen it as his mission to bring regulation to these cryptoassets.
Mr. Gensler is building his case.
After testifying in front of the House Appropriations Committee panel hearing on Wednesday, he told reporters,
“I think a lot of these tokens will fail.”
“I fear that in crypto…there’s going to be a lot of people hurt, and that will undermine some of the confidence in markets and trust in markets writ large.”
Mr. Gensler has his mission set out for him.
Others, like Rostin Behnam, chairman of the Commodity Futures Trading Commission, are right there with him.
The pieces are all coming together.
Earlier this month, the SEC stated that it plans to add 20 investigators and litigators to its unit dedicated to cryptocurrency and cybersecurity enforcement, nearly doubly the unit’s size.
Still, Mr. Gensler does not feel that this is near enough and that more will be added later.
Mr. Gensler, and his predecessor, Jay Clayton, believe that most cryptocurrencies meet the legal definition of a security and thereby should be registered with the SEC,
“There is a path forward,” Mr. Gensler claims.
Mr. Gensler is in the process of constructing that path. He is receiving more and more support for this effort these days, and the number of advocates seems to be growing.
The Future
To me, this battle is going to grow and grow.
I lean to the side of less regulation than more. But, I believe that one should not just dismiss the need for regulation out of pure philosophical thought.
People cheat. People cut corners. People have incomplete knowledge. Bad things happen. Markets, in general, seem to need to have some kind of a watchdog.
It just makes common sense. In this, I am more of a pragmatist. And, like Cass Sunstein, I believe that the regulation of markets should be done incrementally. That we should work through “nudges.”
The problem is, too often, that we wait too long and major problems occur.
In order to put things back into order, we must make major movements.
These major adjustments tend to create their own ‘unintended consequences.”
And, thus, more problems are introduced into the picture.
Markets need to be regulated.
My old Libertarian days are behind me.
We have a major correction taking place. Many, many people are getting hurt in the adjustment.
We need to have Mr. Gensler and others moving to bring more regulation into the area of cryptoassets so as to avoid even further pain.
The regulation is coming. Let’s get on with it.