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      The Crypto Crash: all Ponzi schemes topple eventually

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      The Crypto Crash: all Ponzi schemes topple eventually Robert ReichWe’re back to the wild west finances of the 1920s as the crypto industry pours huge money into political campaigns One week ago, as cryptocurrency prices plummeted, Celsius Network – an experimental cryptocurrency bank with more than one million customers that has emerged as a leader in the murky world of decentralized finance, or DeFi – announced it was freezing withdrawals “due to extreme market conditions.”Earlier this past week, Bitcoin dropped 15 percent over 24 hours to its lowest value since December 2020. Last month, TerraUSD, a stablecoin – a system that was supposed to perform a lot like a conventional bank account but was backed only by a cryptocurrency called Luna – collapsed, losing 97 percent of its value in just 24 hours, apparently destroying some investors’ life savings.Eighty-nine years ago, Franklin D Roosevelt signed into law the Banking Act of 1933 – also known as the Glass-Steagall Act. It separated commercial banking from investment banking – Main Street from Wall Street – to protect people who entrusted their savings to commercial banks from having their money gambled away.Glass-Steagall’s larger purpose was to put an end to the giant Ponzi scheme that had overtaken the American economy in the 1920s and led to the Great Crash of 1929.Americans had been getting rich by speculating on shares of stock and various sorts of exotica (roughly analogous to crypto). These risky assets’ values rose solely because a growing number of investors put money into them.But at some point, Ponzi schemes topple of their own weight. When the toppling occurred in 1929, it plunged the nation and the world into a Great Depression. The Glass-Steagall Act was a means of restoring stability.But by the 1980s, America forgot the financial trauma of 1929. As the stock market soared, speculators noticed they could make lots more money if they could gamble with other people’s money – as speculators did in the 1920s. They pushed Congress to deregulate Wall Street, arguing that the United States financial sector would otherwise lose its competitive standing relative to other financial centers around the world.Finally, in 1999, Bill Clinton and Congress agreed to ditch what remained of Glass-Steagall.As a result, the American economy once again became a betting parlor. Inevitably, Wall Street suffered another near-death experience from excessive gambling. Its Ponzi schemes began toppling in 2008, just as they had in 1929.The difference was this time the US government bailed out the biggest banks and financial institutions. The wreckage was contained. Still, millions of Americans lost their jobs, their savings, and their homes (and not a single banking executive went to jail).Which brings us to the crypto crash.The current chair of the Securities and Exchange Commission, Gary Gensler, has described cryptocurrency investments as “rife with fraud, scams, and abuse.” In the murky world of crypto DeFi, it’s hard to know who provides money for loans, where the money flows, or how easy it is to trigger currency meltdowns.There are no standards for risk management or capital reserves. There are no transparency requirements. Investors often don’t know how their money is being handled. Deposits are not insured. We’re back to the wild west finances of the 1920s.Before the crypto crash, the value of cryptocurrencies had kept rising by attracting an ever-growing number of investors and some big Wall Street money, along with celebrity endorsements. But, again, all Ponzi schemes topple eventually. And it looks like crypto is now toppling.Why isn’t this market regulated? Mainly because of intensive lobbying by the crypto industry, whose kingpins want the Ponzi scheme to continue.Trillion-dollar crypto collapse sparks flurry of US lawsuits – who’s to blame?Read moreThe industry is pouring huge money into political campaigns.And it has hired scores of former government officials and regulators to lobby on its behalf – including three former chairs of the Securities and Exchange Commission, three former chairs of the Commodity Futures Trading Commission, three former US senators, one former White House chief of staff, and the former chair of the Federal Deposit Insurance Corporation.Former Treasury Secretary Lawrence Summers advises crypto investment firm Digital Currency Group Inc. and sits on the board of Block Inc., a financial-technology firm that is investing in cryptocurrency-payments systems.If we should have learned anything from the crashes of 1929 and 2008, it’s that regulation of financial markets is essential. Otherwise, they turn into Ponzi schemes that eventually leave small investors with nothing and destabilize the entire economy.It’s time for the Biden administration and Congress to regulate crypto.
      Robert Reich, a former US secretary of labor, is professor of public policy at the University of California at Berkeley and the author of Saving Capitalism: For the Many, Not the Few and The Common Good. His new book, The System: Who Rigged It, How We Fix It, is out now. He is a Guardian US columnist. His newsletter is at robertreich.substack.com
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      in US Politics

      Biden signs cryptocurrency order to examine risks as popularity rises

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      Biden signs cryptocurrency order to examine risks as popularity risesAction comes as officials increasingly voice concern that Russia may be using cryptocurrency to avoid the impact of sanctions Joe Biden on Wednesday signed an executive order on government oversight of cryptocurrency that urges the Federal Reserve to explore whether the central bank should jump in and create its own digital currency.The Biden administration views the explosive popularity of cryptocurrency as an opportunity to examine the risks and benefits of digital assets, said a senior administration official who previewed the order Tuesday on the condition of anonymity, terms set by the White House.Under the executive order, Biden also has directed the treasury department and other federal agencies to study the impact of cryptocurrency on financial stability and national security.Brian Deese and Jake Sullivan, Biden’s top economic and national security advisers, respectively, said the order establishes the first comprehensive federal digital assets strategy for the United States.“That will help position the US to keep playing a leading role in the innovation and governance of the digital assets ecosystem at home and abroad, in a way that protects consumers, is consistent with our democratic values and advances US global competitiveness,” Deese and Sullivan said Wednesday in a joint statement.The action comes as lawmakers and administration officials are increasingly voicing concern that Russia may be using cryptocurrency to avoid the impact of sanctions imposed on its banks, oligarchs and oil industry due to the invasion of Ukraine.Last week, Democratic Senators Elizabeth Warren, Mark Warner, and Jack Reed asked the treasury department to provide information on how it intends to inhibit cryptocurrency use for sanctions evasion.The Biden administration has argued that Russia will not be able to make up for the loss of US and European business by turning to cryptocurrency. Officials said the Democratic president’s order had been in the works for months before Russia’s Vladimir Putin invaded Ukraine last month. Daleep Singh, a deputy national security and economic adviser to Biden, told CNN on Wednesday that “crypto’s really not a workaround for our sanctions”.The executive order had been widely anticipated by the finance industry, crypto traders, speculators and lawmakers who have compared the cryptocurrency market to the wild west.Despite the risks, the government said, surveys show that roughly 16% of adult Americans – or 40 million people – have invested in cryptocurrencies. And 43% of men age 18-29 have put their money into cryptocurrency.Coinbase Global Inc, the largest cryptocurrency exchange in the United States, said the company had not seen a recent surge in sanctions evasion activity.Janet Yellen, the treasury secretary, said last week that “many participants in the cryptocurrency networks are subjected to anti-money laundering sanctions” and that the industry is not “completely one where things can be evaded”.As for the Federal Reserve getting involved with digital assets, the central bank issued a paper in January that said a digital currency “would best serve the needs” of the country through a model in which banks or payment firms create accounts or digital wallets.Some participants in digital currency welcome the idea of more government involvement with crypto.Adam Zarazinski, CEO of Inca Digital, a crypto data company that does work for several federal agencies, said the order presents the opportunity to provide “new approaches to finance”.“The US has an interest in growing financial innovation,” Zarazinksi said. He added that China and Russia were looking at crypto and building their own currency. More than 100 countries have begun or are piloting their own digital sovereign currency, according to the White House.Katherine Dowling, general counsel for Bitwise Asset Management, a cryptocurrency asset management firm, said an executive order that provides more legal clarity on government oversight would be “a long term positive for crypto”.But Hilary Allen, a financial regulation professor at American University, cautioned against moving too fast to embrace cryptocurrencies.“I think crypto is a place where we should be putting the brakes on this innovation until it’s better understood,” she said. “As crypto becomes more integrated into our financial system it creates vulnerabilities not just to those who are investing in crypto but for everybody who participates in our economy.”TopicsCryptocurrenciesE-commerceJoe BidenUS politicsnewsReuse this content More