Beata Zawrzel/NurPhoto via AP
The crypto industry was always a whiz-bang tech “solution” to a non-problem, unless you were a crook or money launderer trying to hide transactions. Supposedly, crypto assets would be safe and transparent. In fact, the risks were deliberately hidden so that insiders could benefit while naïve suckers took losses.
Crypto schemes fall into two broad categories—unregulated exchanges, and unregulated securities. As regulators led by the SEC have cracked down, the industry has gone even faster into free fall. Sam Bankman-Fried, once the master crypto celebrity, pied piper, and fraudster, now faces 13 distinct criminal charges.
Meanwhile, even the Commodity Futures Trading Commission, the weakest of the regulatory agencies and longtime defender of crypto, has been cracking down. On Monday, the CFTC sued Binance, the world’s largest crypto exchange, for failing to register as an exchange and for violating other regulations. The agency also sued Binance CEO Changpeng Zhao directly.
These entirely justified regulatory woes, combined with Binance’s ill-timed tactic of charging fees for transactions, have caused investors to try to get their money out. The Wall Street Journal reports that Binance has experienced $2.1 billion in net outflows over the last seven days.
Crypto defenders have been howling that the regulators have deliberately taken these actions in order to create “reputational damage” and set off a self-fulfilling prophecy of investors trying to get what’s left of their money out, thus accelerating crypto’s collapse.
If you want to see a classic of that genre, have a look at this whiny 37-page memo by the law firm Cooper & Kirk, which reads as one part conspiracy theory and one part trolling for business.
The memo advises, “On January 3, 2023, the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency released a joint statement informing banks that the three agencies had ‘safety and soundness concerns with business models that are concentrated in crypto-asset-related activities or have concentrated exposures to the crypto-asset sector.’”
Supposedly, this was intended to scare off investors. But crypto indeed has safety and soundness problems. If crypto promoters wanted to avoid a damaging regulatory crackdown and reputational damage, they should have obeyed the law.
Meanwhile, El Salvador, whose president thought it clever in 2021 to adopt Bitcoin as its national currency, has been taking losses. A Bitcoin was trading at around $45,000 when President Nayib Bukele made Bitcoin legal tender. Today, it trades around $25,000.
As an example of the conflicts of interest that pervade the industry, The Wall Street Journal recently exposed the role of a New York couple, Max Keiser and Stacy Herbert, who are heavy investors in crypto, in advising the government of El Salvador to double down on its crypto bets.
In my other posts and longer articles, I’ve been writing about the general failure of the Department of Justice to prosecute corrupt financial executives as individuals. The crypto frauds are so flagrant that they may finally alter that pattern.
