Thanks to FTX, regulating crypto should be easy: The Editors

Three steps in particular would help.

As a start: Make stablecoins stable. Much like money-market mutual funds, stablecoins purport to maintain a constant value in fiat currency, typically $1. Yet they’re often backed by assets ranging from short-term corporate debt to nothing at all. This makes them highly vulnerable to panic withdrawals — which, if they entail sales of assets in the real world, could disrupt the credit companies' need to fund their everyday operations. The solution: Bank regulators can create a limited charter for stablecoin issuers, requiring that any representations of dollars be backed by real dollars deposited at the Federal Reserve. This would ensure stability while leaving issuers to compete on the quality of their technology, which could yet prove useful in making payments cheaper and faster, particularly across borders.

Next, rein in exchanges. FTX’s competitors, such as Coinbase Global Inc. and Binance Holdings Ltd., still don’t face the requirements on safety, soundness or segregation of funds that traditional exchanges do. This leaves them free to put customers at risk, including through proprietary trading and extreme leverage. There’s no need to wait for Congress to determine which regulators should be in charge, or to define digital tokens as securities, commodities or something else. Instead, the Securities and Exchange Commission and the Commodity Futures Trading Commission should cooperate to set up an industry-funded overseer — along the lines of the Financial Industry Regulatory Authority — that would ensure crypto intermediaries meet the same standards as their traditional counterparts.

Finally, maintain a firewall. Financial regulators have so far done a good job of keeping crypto out of traditional banks, which is one reason FTX’s downfall didn’t have broader repercussions. Whether or not they go on to adopt specific rules, they should remain vigilant, to prevent systemically important financial institutions — including nonbanks — from getting too exposed. Digital tokens may eventually have utility as representations of valuable things, but on their own, they have none of the real-world uses or cash flows of assets such as commodities, stocks and bonds. Lending against them is throwing good money at nothing.

Some worry that any regulation would unduly legitimise crypto. That needn’t be the case. On the contrary, clear rules would provide authorities with the framework they need to crack down on non-compliant actors — a category into which FTX, for example, certainly would have fallen. Beyond that, officials should make it abundantly clear that regulation does not imply endorsement — any more than it did with, say, SPACs or meme stocks. Blockchain may yet have promise, but that doesn’t mean the value of cryptocurrencies as we know them won’t go to zero.

Credit: Bloomberg