By Pymnts
As details emerge surrounding the collapse of crypto trading firm FTX, investors should believe them.
In much the same way as Shakespeare’s famous adage states that “a rose by any other name is still a rose,” when crypto companies act like banks or casinos, they should be regulated as such — especially when they lose their customers’ money.
So said Xavier Vives, professor of economics and finance at IESE Business School, who sat down with PYMNTS to discuss what regulatory bodies can do in light of cryptocurrency exchange FTX’s recent and widely-reported implosion.
The Enron-style meltdown of one of the higher-valued and better-known cryptocurrency exchanges is spurring greater calls for crypto regulation. The situation surrounding FTX’s demise ”calls into question the promise of the industry,”
U.S. Sens. Elizabeth Warren, D-Mass., and Dick Durbin, D-Ill., said in a letter.
Next Steps Matter
Crypto is likely to survive the FTX scandal, but more scandals will follow if the adults in the room don’t take the necessary action to prevent them. The contagion from FTX’s collapse is already beginning to spread across the rest of the sector.
“This crisis is a game changer,” Vives said. “It has all the elements of a classic bubble, where people get carried away and if you look at it from the outside you say, okay, this is crazy, but when you are in it, you can’t.”
As it is, he said, many people do not understand blockchain technology or its applications, yet they still invested in it because of the hype.
“These are the classic ingredients for a bubble, no matter what century it is, the Tulip Mania in 17th century Holland or the free banking era in the U.S.,” he said.
The wait-and-see approach to industry regulation is not working, and stifling fraud should be a more important priority for regulators than any fear of being perceived as stifling innovation.
FTX operated a centralized exchange, a role widely understood within traditional finance. Still, a part that, when played within an emergent digital landscape, allowed the company to skate by through a muddled mix of strategic offshore licensing, affiliate umbrellas and tech-speak futurism.
Centralized exchanges make holding and trading cryptocurrencies easy and convenient for users, but just as with any conventional industry operation, they open the door to bad actors and poor managerial decisions.
