For everyone who says that cryptocurrency will never be a business, I'm here to tell you that it already is - for failed cryptocurrency companies. Huobi, a cryptocurrency exchange, laid off 20% of its employees at the end of last week, and the rest of the employees will have to receive a salary in stablecoins, which is expected to reflect $1. In a functioning crypto market, it should be very easy to exchange stablecoins for dollars and use them to pay workers. The fact that this is not happening suggests that stablecoins are indeed significantly less valuable, not to mention the total lack of trust that such activity inspires.
Huobi is one of the many declining companies in the cryptocurrency world. The entry of FTX, which was exposed as a criminal enterprise, wreaked havoc on the nascent asset class through loss of confidence, declining trading volume and similar schemes by FTX's competitors. It was meant to reinforce that the government's success in keeping cryptocurrencies out of the broader financial system was the most important regulatory move of the past decade. We rarely give enough credit to the agencies that stop things from happening; As they say, it's hard to prove a negative. But if we can get out of this cycle without fail, we will have bank regulators led by Gary Gensler of the Securities and Exchange Commission.
More from David Dayen
Here is a quick summary. FTX is now out of business and bankrupt. Major lender Genesis has laid off 30% of its workforce after laying off 20% last August. The company is considering a bankruptcy petition. Genesis helped with Alameda Research and Three Arrows Capital, both of which filed for bankruptcy, so it was probably inevitable. The digital currency group that owns Genesis had Larry Summers on its payroll as a consultant for six years. He recently passed away peacefully.
Meanwhile, Alex Mashinsky, the former CEO of cryptocurrency lender Celsius, has been sued by New York Attorney General Tish James for defrauding investors by lying about the company's finances. Mashinsky described Celsius as "safer than a bank," but he placed customer deposits on risky bets that backfired. His stunts caused a loss of about 440 million dollars.
FTX live commentary also continues. Silvergate, the modest bank that serves as a conduit for cryptocurrency companies, has seen its shares plunge 84 percent in the past three months as cryptocurrency-related deposits fall off the cliff and assets are quickly sold off to bidders . Law enforcement agencies are seizing Silvergate accounts in an attempt to recover FTX customers' money.
Bitcoin prices have rallied since year-end lows, but I think it's clear that the turmoil in the digital asset markets is far from over. Even Binance, the largest and most stable cryptocurrency exchange, has fallen short in terms of finances, losing $12 billion in assets in the past two months.
If we can get out of this cycle without delay, it will be thanks to the bank regulators led by Gary Gensler of the Securities and Exchange Commission.
Hedge funds that have done business with Binance are receiving calls about federal investigations under anti-money laundering laws. Meanwhile, the SEC, along with securities regulators in Texas, objected to Voyager Digital's purchase of Binance's assets from a bankrupt lender.
Perhaps the most significant action by banking regulators did not involve a specific cryptocurrency or token company. The Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency issued a joint statement last week essentially asking major banks to reconsider any plans to hold cryptocurrencies in their wallets. After outlining the many risks of cryptocurrencies, including fraud and deception, misrepresentation and mismanagement of risk by cryptocurrencies, high volatility, legal uncertainty and the possibility of digital versions of old banking practices, the regulators said: "With the cryptocurrency sector cannot be restricted or regulated, it will be a major threat to the banking system.” They don't migrate.
While the joint statement went on to say that banks will not be prohibited or prohibited by law from providing legal services to clients, you don't need to read between the lines to understand the regulators' view. At this time, the big banks don't want you to invest in a lot of cryptocurrencies and look closely at such transactions. "Issuing or holding assets such as crypto-core assets ... may be inconsistent with safe and sound banking practices," the regulators wrote.
The statement was known both for what it said and for what was said. The OCC and the Fed have entered the cryptocurrency industry at different times, with the OCC issuing special charters for cryptocurrencies. But now they have followed Gensler's lead and last April argued against similar cryptocurrency ownership that banks should write off digital assets as liabilities on their balance sheets. Gensler's ad was a huge success in keeping banks away from cryptocurrencies.
Gensler also ruled out the creation of a Bitcoin exchange-traded fund that would make it easier for banks and individuals to gain exposure to cryptocurrencies, just as derivatives would prolong the damage of the housing bubble's collapse into the future. Only for those who hold physical mortgages or mortgage-backed securities with a very large pool of investors.
The SEC filing with FTX officials Caroline Ellison and Gary Wang shows Gensler's efforts to protect the public. The agreement specifically states that FTX's FTT crypto token is the security that Gensler has been seeking for two years. The securities must be filed with the SEC. None of this is done in the world of cryptocurrencies, which is why companies have refused SEC requests. If a takedown agreement is approved, the SEC can use that precedent to show that the industry as a whole is not in compliance. This could put an end to the use of these tokens, which are sometimes affectionately called "shitcoins" and are ripe for abuse.
In A key factor in the financial crisis of 2008 were regulators who failed to protect the broader system by recognizing the dangers of the ever-expanding housing bubble. Gensler learned that lesson in the crypto fiasco. While client funds sadly evaporated, those not tied to digital assets largely escaped harm. The system worked to contain the mysterious chaos. This is a direct result of Gensler's smart approach that the rest of the regulators now support.
I'm sure Congress will try to "do something" about cryptocurrencies, declaring that this unregulated space needs to be tamed. But it is important to know that the most important solution has already happened. Securities and banking regulators have shielded the economy from a cryptocurrency-led recession. This shows how important it is to have the right people to make decisions. As the digital asset industry continues to shake out, at least those not involved in cryptocurrencies are paying the price. Maintaining this barrier should be a future goal.