Can the Law Fix Crypto’s Problems?

We have been watching the Sam Bankman-Fried trial. We also saw on the news that Singapore put the founder of Three Arrows capital in jail. Meanwhile, the Securities and Exchange Commission and the Commodity Futures Trading Commission are going after the likes of Binance and Coinbase. Crypto has its problems. Many of them were highlighted during crypto winter. Part of what we are seeing today is the dealing with specific crypto-related crimes. Part is sorting out who makes the rules that crypto needs to follow. We wonder this. Can the law fix crypto’s problems?

Can Things Wrong With Crypto Be Fixed?

The huge monetary losses during crypto winter showed us things that crypto needs to fix. It showed us that regulation is needed to monitor things, discourage criminal activity, and protect both investors and consumers. Human nature being what it is, we think there is a risk that some of the same problems will reemerge no matter how well crypto is regulated and for how many years they send Bankman-Fried to prison. Putting one person away does not necessarily deter the next person.

Is Punishment of White Collar Crime a Deterrent?

On April 14, 2021 Bernard Madoff died. The one time Nasdaq stock exchange chairman was in prison. He ran the biggest Ponzi scheme in American history ($64.8 billion). He was serving a 150-year sentence. There are two reasons we send people to prison. It keeps them out of society and makes it impossible to commit more crimes. And it acts as a deterrent to others who may be thinking of doing equally bad things. Madoff certainly did not commit any more crimes. However, just a year after Madoff’s death Sam Bankman-Fried was charged with another Ponzi scheme involving billions of dollars’ worth of mostly crypto assets. The example of Madoff did not deter Bankman-Fried.

A Very Short History of Business Regulation

The crypto world is very young when compared to the world of traditional finance. Problems in business have been emerging ever since folks have been doing business.  The Romans said that the buyer needs to beware (caveat emptor). As the American economy expanded in the 19th and early 20th century, a handful of people in business amassed great wealth and power. Their means of achieving such status and how they maintained it were often immoral but not necessarily illegal. The government needed to step in to break up the Standard Oil Trust, American Tobacco Company, and Andrew Carnegie’s steel company. These monopolies thrived because of their ability to control prices. They are now gone. Banks collapsed in the 1930s after they invested in the stock market and did not safeguard money of their depositors. Today we have the FDIC that insures deposits and oversees banks.

Will Regulation Provide Safety in Crypto?

Crypto was supposed to be a good way to send and receive money via the internet. It was supposed to get rid of the middlemen who siphoned off assets and manipulated the financial system. Who could have foreseen that this vehicle would create immense wealth? Someone should have seen that with such wealth would come temptation to manipulate the system and create monopolies. Any student of history can see that humans tend to be greedy. This leads all to often to folks attempting to manipulate whatever financial system there is for their own gain. Roosevelt took down the trusts over a century ago but today we have Google, Apple, Microsoft, Amazon, and Meta whose control over the internet, our communications, our privacy, and our assets rivals the control that Standard Oil, Carnegie and American Tobacco had more than a century ago.

In the crypto world we saw FTX rise to great heights and then collapse. The argument that regulators and law enforcement have with FTX is not that the business failed. It is that client assets were used as personal funds and customers were lied to as to the company’s degree of financial distress. If the next FTX is better regulated, regulators will have an eye on its assets and be able to warn investors and customers in time for them to take their own necessary actions. But it doesn’t mean that folks won’t try to game the system again and again.

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