No one knows when an investment bubble will burst, but in retrospect, there’s often a single event that comes to symbolize the beginning of the end — as the Lehman Brothers implosion is now forever intertwined with the collapse of the housing bubble and the Great Recession. It’s understandable that many see the recent collapse of cryptocurrency exchange FTX — and the ripple effects from that news — as the beginning of the end for a cryptocurrency bubble, and perhaps for cryptocurrency itself. Or perhaps it’s just the end of the beginning?
I recently hosted a discussion with several crypto experts at my regular “In Conversation” column I publish with Duke University. You can read the entire threaded dialog at the In Conversation page, but I’ll give you highlights here:
From Lee Reiners, a Duke professor who formerly worked at the New York Fed:
“One can only hope that it is the end and we all move on to more productive things. Imagine how much better the world would be if all the money and human capital that has flooded into cryptocurrency over the past decade had instead gone into addressing climate change or curing cancer? But the allure of quick and easy riches is hard to resist for many people.
“As much as I wish it were so, I do not believe this is the “end” of crypto. … I see the industry increasingly embracing DeFi, or decentralized finance. DeFi represents traditional financial services offered on the blockchain without the need for any third-party intermediaries, all made possible by smart contracts. DeFi is particularly problematic from a regulatory standpoint, as regulation traditionally applies to legal entities. Who is responsible for compliance when the service is provided by open-source software?
“DeFi, and crypto more generally, are destined for the ash heap of history because they provide no genuine economic utility. But I do not believe it will be a swift death. At this point, crypto has taken on religious elements and there will always be a core group of true believers, no matter what happens. But as time passes and people realize crypto’s killer use case will never come, most people will move on to other things and twenty years from now, we’ll share a drink and remark: “remember when crypto was a thing, those were wild times.” Until then, good people must actively resist the crypto-con so that innocent people are not taken advantage of, national security is not undermined, and financial stability is maintained. It won’t be easy, but it is necessary.
From Shane Stansbury, Duke professor and former federal prosecutor with the SDNY
“It has been difficult to watch the celebrity marketing blitz in this industry over these last couple of years with the sinking feeling that the day would come when many average folks would lose their shirts (or, quite literally, their life savings).
“Will the likes of LeBron James and Tom Brady think twice in the future before placing their reputations on a product like this? I like to think so (and surely Taylor Swift is relieved that she passed on the opportunity).
“With all due respect to fans of Kim Kardashian, enforcement actions can serve as important deterrents. Although investor lawsuits can be an uphill climb (in part because of the difficulty of linking one’s loss to specific endorsements), the SEC did reach a $1.2 million settlement with Kardashian for failure to make proper disclosures when touting a crypto asset on her Instagram feed. Regardless of your net worth, that’s real money and few celebrities want to find themselves entangled in regulatory actions or, even worse, getting a knock on the door by criminal investigators. There are easier ways to make a buck, and none of this can be good for one’s brand.
“Like Lee, I don’t think crypto is going away anytime soon, at least absent some other major developments (always a possibility in this space). As bad as the SBF/FTX debacle was, it was no Lehman Brothers, in part because the scale and global financial impact are different by orders of magnitude. Most of the victims were institutional investors, and their losses, however painful, did not send shockwaves through the larger financial system. That matters for purposes of the level of accountability that the public will demand.”