Crypto will survive the FTX collapse but more scandals will follow | Kenneth Rogoff

T.The Spectacular Collapse of Genius Sam Bankman-Fried’s $32 Billion (27 Billion) Crypto Empire FTX big financial bankruptcy all the time.with an overflowing story celebrity, politicians, sex and drugs, the future looks bright for feature film and documentary producers. However, to paraphrase Mark Twain, rumors of the death of cryptocurrency itself are greatly exaggerated.

Indeed, the loss of trust in exchanges (essentially cryptocurrency financial intermediaries) such as FTX will almost certainly mean that the price of the underlying asset will continue to plummet. The majority of Bitcoin transactions take place “off-chain” on exchanges rather than on the Bitcoin blockchain itself. These financial intermediaries are very convenient, non-technical to use, and waste very little energy.

The emergence of exchanges has been a major factor in accelerating the rise of cryptocurrency prices, and if regulators crack down on exchanges, the price of the underlying tokens will fall. according to, Bitcoin And the price of Ethereum plummeted.

But price adjustments alone aren’t the end of the world. The pertinent question is whether cryptocurrency lobbyists can contain the damage. So far their money has spoken a lot. Bankman-Fried reportedly $40 million His FTX colleague Ryan Salame reportedly donated $23 million to the Republican Party. Such generosity has certainly helped convince regulators around the world to follow a wait-and-see approach to cryptocurrency regulation instead of being seen as stifling innovation. rice field. Well, they’ve been waiting, and I hope they’ve seen it in the FTX crash.

But what do they conclude? The most likely path is better regulation. centralized exchange Companies that help individuals store and trade cryptocurrencies off-chain. The fact that a multi-billion dollar financial intermediary wasn’t subject to normal record keeping requirements is bewildering no matter what you think about the future of cryptocurrencies.

Companies will face the cost of compliance, but effective regulation can restore trust and benefit companies looking to operate honestly. The currency could even go up in price, but much depends on the extent to which regulatory demands, especially regarding personal identities, ultimately hurt demand. could be remittances from wealthy countries to developing and emerging markets and capital flight in the opposite direction. In both cases, the desire of both parties to avoid exchange controls and taxes implies a strong emphasis on anonymity.

Meanwhile, Vitalik Buterin, co-founder of the Ethereum blockchain and one of the most influential thinkers in the cryptocurrency industry, said: claimed The real lesson of the FTX demise is that cryptocurrencies need to return to their decentralized roots. Centralized exchanges such as FTX make holding and trading cryptocurrencies much more convenient, but at the cost of opening the door to management corruption, much like traditional financial firms. Decentralization can make them more vulnerable to attacks, but so far, the biggest cryptocurrencies such as Bitcoin and Ethereum have proven resilient.

The problem with having only a decentralized exchange is that it is inefficient compared to e.g. Visa or Mastercard or regular banking in developed countries. Centralized exchanges such as FTX have democratized the crypto domain, allowing ordinary people without technical skills to invest and trade. It is certainly possible that we will eventually find a way to replicate the speed and cost advantages of centralized exchanges. However, this is unlikely in the foreseeable future, making it difficult to understand why someone not involved in tax and regulatory evasion (not to mention crime) would use crypto. long emphasis.

Perhaps regulators should push towards a decentralized equilibrium by requiring exchanges to know their identities. Anyone Who do you trade with, including blockchain? While this may sound harmless, it makes trading on anonymous blockchains on behalf of exchange customers considerably more difficult.

Certainly, there are alternatives, including chain analysis, where transactions can be algorithmically examined in and out of Bitcoin wallets (accounts), potentially revealing underlying identities. But if this approach is always sufficient and all semblance of anonymity can always disappear, it is difficult to see how cryptocurrencies can compete with more efficient financial intermediation options. is.

Finally, many countries may seek to eventually ban all cryptocurrency trading, rather than simply ban cryptocurrency intermediaries. Making trading in Bitcoin, Ethereum, and most other cryptocurrencies illegal won’t stop anyone, but it will definitely constrain the system. Just because China was one of the first country girlfriends doesn’t mean the strategy is wrong. Especially if the primary transaction is suspected to be related to tax evasion or crime similar to high denomination bills such as $100 bills.

Ultimately, many other countries are likely to follow China. However, the most important player, the United States, with its weak and fragmented cryptocurrency regulation, is unlikely to embark on a bold strategy any time soon. maybe. Unfortunately, it’s unlikely to be the last.

Kenneth Rogoff is a professor of economics and public policy at Harvard University. From 2001 he was the chief economist of the IMF until he was 2003.

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