The surprising effectiveness of crypto regulation

Stephen Diehl is a programmer and co-author of the book Bursting the crypto bubble.

Not so long ago, you couldn’t ride the London Underground without being bombarded with intrusive advertisements saying, “Now is the time Bitcoin to buy” or enticements for the latest cryptocurrency with dog motifs coin.

In hindsight, the result was pretty predictable. Convulsions of euphoric excess speculation and promises “this time will be different” have been an inescapable part of society for centuries. What was really different this time, however, was how many of our institutions correctly recognized and successfully prevented many of the worst excesses of this bubble.

Those of us who have watched in horror at the crypto craze are wracked with fear of what the inevitable collapse might entail. And yet, when it finally arrived, it wasn’t with a bang but with a whimper. The response from the broader financial system was more of a shrug.

However, the reason for this controlled implosion is not purely accidental and is due in large part to the vigilance of regulators, the press and officials.

Unknown to many, a parallel, thoughtful discussion about crypto takes place every day. Far removed from the din of social media, a more sober policy debate is unfolding in legal journals, symposiums, and policy whitepapers as agencies grapple with the truly novel and strange implications of technology.

And there are many schools of thought for and against the multitude of policy proposals – including banning crypto, burning crypto, regulating crypto as a game of chance, using existing financial regulatory capacity to regulate crypto without additional legislation, and proposing entirely new ones to bespoke ones laws.

However, extending the protection and privilege of legitimacy-generating regulation must be tied to an adequate answer to crypto’s existential question: what is its purpose?

Outside of crypto circles, few people find the circular and self-referential explanation that “the purpose of crypto is to trade more crypto” particularly satisfying. Until we have a better answer, the traditional financial system should remain sealed off from this experiment, lest its turmoil ever grow beyond a storm in a teacup. Thankfully, we’ve essentially done that in the US and UK.

In the US, actions by the Federal Reserve, IRS, OCC, and Department of Justice have been surprisingly effective in curbing the growth of the crypto industry. The SEC obstructed the initial coin bubble offering, has initiated over 130 enforcement actions against crypto entities and has yet to lose a single one. The Fed and FDIC have severely restricted interactions between banks and crypto markets. Even at the height of cryptomania last year, the overall “value” of Bitcoin was just a drop in the bucket of US capital markets; less than that of a single public company like Microsoft.

In the UK, despite the government’s fickle flirtation with the industry, crypto exchanges have never taken root and have struggled to secure a financial services license. The FCA and Bank of England have consistently warned the public that they should be prepared to lose all their money in crypto (unfortunately, a painful reality that many victims have experienced first-hand). The UK Treasury never did NFT coined that it had once promised. The crypto industry was never intertwined with the city and remains systemically irrelevant to the UK economy.

Our regulators and agencies have done the right thing, despite the remarkable level of speculative zeal, the unpopularity of skepticism, and the pliability of politicians. And credit is due to the foresight and thankless labor of thousands of officials who have quietly protected our financial systems from crypto shocks, by action or strategic inaction.

The alternative story, in which we had prematurely added crypto to the regulatory mandate, could have had far more disastrous outcomes. In other words, actually this time was different — our institutions functioned.