Thanks to FTX, Regulating Crypto Should Be Easy

The demise of the FTX crypto-empire is unfolding on Twitter, in bankruptcy proceedings and possibly in criminal court. Legislators and regulators are asking the question: What, if any, can they do to civilize a market so rife in abuse? It exposed flaws in a market that had never been able to fully understand the blockchain technology. It also vindicated officials that saw danger in the speculative frenzy around virtual tokens without intrinsic value. Regulators might be tempted just to relax and hope that the crypto market will eventually burn out, ending the entire bizarre episode. This would be wishful thinking. Officials must learn from 2022's failures, including the collapse of Terra stablecoin and FTX. This will ensure that there is no renewed speculation. Stablecoins are similar to money-market mutual funds. They claim to have a constant fiat currency value, usually $1. They are therefore vulnerable to panic withdrawals. These could, if they involve the sale of real assets, disrupt credit companies' ability to finance their daily operations. Bank regulators have the ability to create a limited charter that requires stablecoin issuers to back any dollar representations with real dollars deposited at The Federal Reserve. FTX's rivals, Coinbase Global Inc. or Binance Holdings Ltd. don't have to meet the same safety, soundness, and segregation requirements as traditional exchanges. They should be vigilant, regardless of whether they adopt specific rules. This is to ensure that systemically important financial institutions, including nonbanks, are not exposed. While digital tokens might eventually be useful as representations for valuable things, they do not have the cash flows or real-world uses of commodities and stocks. This is not the case. Clear rules, on the other hand, would give authorities the tools they need to crackdown on non-compliant actors -- a category that FTX would certainly have fallen into. Although blockchain may still have promise, it doesn't necessarily mean that the value of crypto will go to zero. Here's to Crypto Going The Way of Esperanto. David Fickling* SBF's Apology Was As Hollow as His Empire. Lionel Laurent* Got Money. Why Digital Cash Needs to Feel Real: Andy MukherjeeThe Editors are members of the Bloomberg Opinion editorial board.More stories like this are available on bloomberg.com/opinion