After FTX’s recent collapse, it’s time to slightly revise an old Reagan-era adage: “Trust, but verify.” This adage was first used in the context of Cold War nuclear weapons diplomacy, and now applies to today’s cryptocurrency market , which exposes small investors to unusually high risks.
The federal government is at a crossroads, facing two possibilities: They can either continue on their current path and welcome more instability, or they can regulate cryptocurrencies, potentially providing legitimacy to a new type of financial product, but It will also be stress-tested, requiring it to prove that its much-touted virtues can stand up to the test.
I have spent decades studying the sociology of trust as it pertains to credit, regulatory arbitrage, and financial markets – and I believe that regulation is most likely to be a stabilizing force while protecting small investors from many after the FTX collapse extreme loss suffered. If cryptocurrencies are to survive, it’s time for regulators to stop standing by.
Over the past few years, a perfect storm has been brewing in the cryptocurrency market. Retail investors flock in, possibly out of fear of missing out or motivated by the prospect of big gains. Promoters make it easy for people to transact on their home computers and smartphones by developing user-friendly apps. Investing is starting to look like a game.
Many new entrants to the market do not fully understand what they are entering and the risks they face. They may trust some well-known market figures, such as the disgraced FTX founder Sam Bankman-Fried (Sam Bankman-Fried), believe that Larry David (Larry David) for FTX at the Super Bowl Celebrity endorsements prominently placed in commercials such as filming, or “investment from experts” who believe in venture capital firms, hedge funds, and private equity firms investing in cryptocurrencies.
We have since seen that even the experts are not so smart about investing. The cryptocurrency market has experienced multiple booms and busts, gradually moving from the anarchic fringes of the tech industry to the center of the financial market.
The SEC’s job just got easier
Many federal politicians are swayed by industry lobbying, so so far the government has created few standards or protections for small investors. Regulators have also been hesitant about what to do, unsure whether these exotic and volatile assets involve financial securities, derivatives, currencies or something else entirely. They are reluctant to intervene in deals that appear to be at the forefront of wealth creation.
As the cryptocurrency market faces its own “Lehman Brothers moment,” one must consider whether sudden losses could spread and even threaten the stability of the wider financial system. The larger the cryptocurrency market and the more major financial institutions involved, the greater the danger.
By delaying intervention in the cryptocurrency market, the SEC may be giving some investors a hard time. There’s nothing more centering than losing money: it makes regulation seem more necessary, which changes the general conversation and the political landscape, and it makes the SEC’s job easier.
If regulators try to act sooner, it will be harder for them to argue that, without regulation, bad outcomes could have occurred. Now, everyone knows what those bad outcomes are, and subsequent regulation is easier to justify.
The SEC and other regulators should seize this moment. Small investors lack the deep pockets and flexibility that larger investors benefit from, and they should be able to participate in a system that requires more than social trust. They deserve regulatory protection to verify the relative stability and safety of cryptocurrency investments.
President Reagan could rely on the sophisticated U.S. government intelligence agencies to independently verify that the Soviet Union was complying with the nuclear weapons treaty: not just trusting Russian leaders.
Today, small investors need a strong public regulator to oversee market participants and relatively independently ensure they follow the rules to protect investor interests. Adequate capitalization of key market players needs to be done in a transparent manner and not through layers of offshore shell companies.
Someone has to make sure that complex ownership interests don’t create a conflict of interest (encouraging the use of investors’ money as a piggy bank) that others can take advantage of. Those seeking funds from ordinary people must be candid about the downside risks and upside potential of cryptocurrency investing. The cryptocurrency market will benefit from the legitimacy that regulatory oversight can provide, assuring market participants that the “Wild West” era is over.
It’s good to be able to trust, but it’s better to be able to verify. For small investors in the cryptocurrency market, this is now a top priority for governments. (Fortune Chinese website)
Bruce G. Carruthers is the John D. MacArthur Professor of Sociology at Northwestern University and author of The Economy of Promises: Trust, Power, and Credit in America. : Trust, Power, and Credit in America).
Translator: Zhong Huiyan-Wang Fang
Following the recent collapse of FTX, it’s time to repurpose an old Reagan-era phrase: “Trust, but verify.” First used in the context of Cold War nuclear arms diplomacy, the phrase now applies to today’s cryptocurrency markets, which have exposed small Investors to disproportionately high risk.
The federal government is at a crossroads, facing two possibilities: They can either continue on the current path and keep the door open to more instability or regulate crypto, potentially lending legitimacy to a novel financial product–but also putting it through that through a stress test will require it to demonstrate that its much-touted merits can stand up to scrutiny.
I’ve spent decades studying the sociology of trust as it relates to credit, regulatory arbitration, and financial markets–and I would argue that regulation is most likely to serve as a stabilizing force, while protecting small investors from the extreme losses that many suffered after FTX’s downfall. If crypto is here to stay, it’s time for regulators to step off the sidelines.
A perfect storm has been brewing over the past few years in crypto markets. Retail investors rushed in, perhaps motivated by the fear of missing out or inspired by the prospect of spectacular gains. Promoters eased their way by creating user-friendly apps so that people could trade from their home computers and smartphones. Investing began to seem like a game.
Many of these new entrants into the market didn’t fully understand what they were getting into and the risks they were running. They may have trusted prominent market figures like FTX’s now-disgraced founder Sam Bankman-Fried, well-placed celebrity endorsements like Larry David’s Super Bowl ad for FTX, or the “smart money” put into crypto by venture capital firms, hedge funds, and private equity.
We’ve since seen that even the smart money wasn’t so smart. Cryptocurrency markets have gone through multiple booms and buses as they gradually moved from the anarchic fringe of the tech industry toward the center of financial markets.
The SEC’s job has been made easier
Many federal politicians have been swayed by industry lobbying efforts, so until now there has been little effort to set standards or establish protections for small investors. , derivatives, money, or something entirely different. They were reluctant to meddle with transactions that seemed to be on the cutting edge of wealth generation.
As cryptocurrency markets face their own “Lehman Brothers moment,” one must consider whether the sudden losses could be contagious, or even threaten to destabilize the broader financial system. The bigger crypto markets become, and the more they involve major financial tutelage, the ginsti the danger.
It’s possible that by deferring intervention in crypto markets, the SEC allowed some investors to get their fingers burned. Nothing concentrates minds like losing money: it changes both the general conversation and the political landscape by making regulation seems more necessary, which makes the EC job easier.
Had regulators tried to move earlier, it would have been more difficult for them to argue that bad outcomes might occur without oversight. Now, everyone knows what those bad outcomes look like, and subsequent regulatory moves have become easier to justify.
The SEC and other regulatory actors should seize the moment. Small investors, who lack the deep pockets and flexibility that large investors benefit from, should be able to participate in a system where more than social trust is required. They deserve the kind of regulatory protection that verifies the relative stability and security of crypto investments.
President Reagan could rely on an elaborate US government intelligence apparatus to independently verify Soviet compliance with nuclear arms treaties: He didn’t simply have to trust the Russian leadership.
Today, small investors need a robust public regulatory apparatus that will oversee market actors and independently ensure their compliance with rules to protect investor interests. Adequate capitalization of key market players needs to be done transparently, rather than through comp layers of offshore.
Someone must make sure that complex ownership interests do not create conflicts of interest that fuel the temptation to treat investors’ funds like a piggy bank to be raided when convenient. Those seeking funds from ordinary people must be forthright about the downside risks as well upside potential of cryptocurrency investments. Crypto markets will benefit from the legitimacy that regulatory oversight can offer, providing assurances to market participants that the “wild west” era is over.
It is good to be able to trust–but much better to also verify. For small investors in cryptocurrency markets, this is now an imperative that the government can’t ignore.
Bruce G. Carruthers is the John D. MacArthur Professor of Sociology at Northwestern University, and author of The Economy of Promises: Trust, Power, and Credit in America.
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