Crypto Pseudo-Banks Have A Way To Go

“Fundamentally, crypto lenders have the same business model as banks.”

So writes Alexander Osipovich in the Wall Street Journal.

“But, traditional banks are subject to a web of regulations including capital requirements, bank examiners who review the quality of loans, and a backstop from the Federal Deposit Insurance Corp. to ensure that small depositors are kept whole in the case of a bank failure.”

“Crypto lenders don’t have such protections.”

However, writes Mr. Osipovich,

“Many of the biggest names in crypto lending have failed in the past half-year, highlighting the shaky foundations, risky practices, and lack of regulation in the sector.”

“Now, millions of depositors who parked savings with such lenders are in limbo as they hope to get back some portion of their money in slow-moving bankruptcy proceedings.”

“Two big lenders, Celsius Network LLC and Voyager Digital Ltd. filed for chapter 11 bankruptcy protection in July. Another one, BlokFi Inc., followed suit in November. Genesis Global Capital LLC suspended withdrawals the same month and ultimately tumbled into bankruptcy on Thursday, along with two related units, Genesis Global Holdco LLC and Genesis Asia Pacific Pte. Ltd.

And, so the world moves on.

To me, crypto has been crumbling during the past six months and the reasons, I believe, are very clear.

First of all, however, let me just say that I believe that finance will eventually go digital, and digital will rule the world.

But, as with all major transformations in business or industrial structure, successful evolution takes time and the results of evolution are not known beforehand

The evolution taking place due to such a massive change in technology is subject to radical uncertainty. There are known unknowns, but there are also a lot of unknown, unknowns.

We just have no real conception of what the “digital world” we are evolving into is going to be like.

Thus, we experiment, we try things, things don’t work, we experiment some more, and some things works, others don’t but we keep going.

And, that is where we are right now.

And, we keep trying.

The Current Scene

In the current situation, we are now seeing a lot of failure.

The list suggested above is only just one part of the crypto-world and its successes and failures.

Obviously, we have left out the failure having the highest visibility, the failure of FTX, which went into bankruptcy last November.

But, FTX, and others, went through a special time, one that will probably not be duplicated in the near future.

Let me list three special happenings that contributed in major ways to the rise…and fall…of FTX and other failures of the crypto-world.

The first thing that I would like to focus on is the role that investors with a libertarian philosophical leaning played in the rise of the crypto-markets.

In the early part of this century, the changing world of information technology drew the interest of a lot of people with a libertarian background who saw the evolving world of information as a perfect place to bring their free-market ideas to this new world whose foundation was information.

This movement fit in perfectly with the changing interpretation of the world where everything was seen as constructed out of information. Modern physics was a leader in this approach and, as the theory grew, the idea spread to other fields, where the actions of the world were conceived to all be information based.

This was a perfect idea for libertarians who saw the world changing and evolving through the growth and spread of information.

So, individuals with a libertarian background were a rich source of resources that were open to the changes the world of information was introducing innovation and evolution.

Second, the Federal Reserve System created a financial environment where billions, even trillions, of dollars were available to those working to build this new world of radical change. I have written many article on how the Federal Reserve has behaved over the past five- to eight-years and how the Fed’s actions resulted in a major asset bubble that really changed the world of finance during this period.

I have written several articles, specifically on FTX, that show how the timing of most of what FTX did was related to the timing of the Fed’s asset bubble and the spread of monies through the financial system to provide the resources needed to expand and grow the crypto-world.

Third, the Fed’s asset bubble came to an end in 2022 as the effort of “quantitative tightening” brought to an end the period when young firms, like FTX, could attain almost all the money they needed in order to stay alive.

Toward the end of 2022, the “banquet” ended.

The following collapse has shown most of the shortcomings connected with the rise that had taken place.

The gates had been opened. A community had been formed to take advantage of the open gates. And, the obvious consequence of the flood of investment that took was forthcoming was the inadequacy of the uninhibited free-market response that had grabbed onto all the money that was available to the innovators.

Now, we must move into the next stage of digital change.

Things are moving slowly because people and especially investors are trying to find what is the most sensible move for institutions to make.

Regulation

The most important lesson learned from this exercise is that oversight and regulation are needed for the financial world to advance.

This is one point that stands out very clearly.

There is lots of history to draw from when discussing where financial order came from and where financial order might be needed going forward.

I am very much an “open-market” guy, but I know from all the work that I have done in financial markets and in running financial institutions, there are still many, many areas of banking that need oversight and control.

In a world of “incomplete information,” people need to be watched.

And, this is another reason of why the recent crypt-world experience is so important.

Even though we see that all around us information is growing and spreading, the world is still a world of “incomplete information,” a world where we do not know what all the outcomes might be, a world where people can “take advantage” of others in the market place, and a world that cannot just be left to itself.

Digital World

The world is going to become more and more digital. I am all in favor of this. We can’t stop this evolution, but we can world “with” the changing world.

Furthermore, the United States dollar is the world’s number one currency and needs to remain that way.

Thus, the United States must move to be a leader in the digital world and must move to be a part of all that will take place going forward.

But, this is why the United States must also be responsible and prudent in all it does in terms of its fiscal policy and its monetary policy.