Cryptocurrencies without Rules

Mario Platero 
Columnist for la Repubblica, Guarantor for the Italian edition of The New York Times, President Gruppo Esponenti Italiani New York, Chairman Palazzo Strozzi Foundation USA

At the root of the Ftx contagion there is something much deeper and more momentous than the financial catastrophe that has knocked out cryptocurrencies last November. The accounting, administrative and management chasms – and the colossal losses – that emerged after the bankruptcy of Ftx, one of the most important groups for the trading in virtual currencies - and the expected indictment of its legendary founder, Sam Bankman-Fried, 30, become the symbol of a frontal conflict between an increasingly disruptive digital economy, which does not want rules, and a traditional economy which is based on codified methods of behavior to protect the market, the shareholders and the consumer himself. In essence, a strict legislation in finance has the ultimate goal of protecting us from the risk of systemic crises similar to the one that hit the cryptocurrency sector with the speed of a hurricane.

We learn a detail every day, but John Ray III, the liquidator in the Enron scandal, in charge of the Ftx case in the Delaware court, said he had never seen in 40 years of the profession “such a complete failure of corporate controls or such total absence of credible financial information as in this case”. Ftx is worth zero today. It pulverized 30 billion dollars of capitalization just a few months ago. It has dragged pension funds like Canada's OTPP for Ontario teachers, or solid investment companies like Sequoia into chaos. More generally, the cryptocurrency sector has lost more than 70%. Janet Yellen, Treasury Secretary and former central banker, says rules and controls are needed at this point. But imposing rules on cryptocurrency means stripping it of its original meaning, to the point that the Nobel laureate Paul Krugman, always a critic, wrote that the entire market may have come to an end. Possible, also because central banks will soon offer digital currencies to in turn disintermediate the banking sector. After all, why was absolute secrecy needed only and always in the simplification of transactions offered by cryptocurrencies? Just to release creative energies? Or to encourage the illicit trafficking of criminals, tax evaders, drug traffickers who now only use cryptocurrencies for their trafficking?

Thus we return to the ongoing conflict between those in the digital economy who claim they can best express their creative innovation in an undefined bubble without borders – except those of computer codes – and those who, like Yellen, invoke the introduction of strict rules. Bankman-Fried (prophetic surname!) belongs to the new fantasyland where anything goes. Starting at the age of 24 from an arbitrage operation on cryptocurrencies, he has become a billionaire and legendary in just a few years. Also for his philosophy of alleged altruism: in recent months he had bought other groups that operate in cryptocurrencies to “rescue” them. Then it was discovered that he used investors' funds to personally speculate on the market through his other company, in violation of the law. He was able to do so because he wasn't subject to the rules and controls as happens to every financial institution. His world, like that of Elon Musk, who attacks and deliberately violates the rules of the SEC, the stock market control agency, of Peter Thiel, of Vivek Ramaswamy, who has launched an anti-ESG (Environmental, Social and Governance principles) fund.

It's a fantasy world that rests on acronyms like Yolo (You Only Live Once) coined by rapper Kendrick Lamar ten years ago, suggesting living in the moment, without planning budgets or financial resources. It fits in with another Silicon Valley postulate for getting money from investors: “Fake it until you make it”. A philosophy that wants to destroy the perimeters of the rules followed by those who instead proceed in transparency and credibility. If it is true that capitalism benefits from “creative destruction”, as the great Joseph Schumpter explained, it is also true that there is a fundamental difference between cutting a dead branch or archiving an outdated technology, and cheating. The problem? With rules, the entire cryptocurrency sector could come to the end of the line. But we will have imposed perimeters on the digital economy, necessary in order not to get hurt, both they, the new young and billionaire protagonists, and we, mortal commoners.