The Crypto Crash: All Ponzi Schemes End Up Tipping | Robert Reich

OA week ago, as cryptocurrency prices plummeted, Celsius Network – an experimental cryptocurrency bank with over a million customers that has become a leader in the murky world of decentralized finance, or DeFi – announced it was freezing withdrawals “due to extreme market conditions”.

Earlier last week, Bitcoin fell 15% over 24 hours to its lowest value since December 2020. Last month, TerraUSD, a stablecoin – a system that was supposed to work much like a conventional bank account but was only backed by a cryptocurrency called Luna – crashed, losing 97% of its value in just 24 hours, seemingly destroying some investors’ life savings.

Eighty-nine years ago, Franklin D. Roosevelt signed the law the Banking Act of 1933 – also known as the Glass-Steagall Act. He separated commercial banking from investment banking – Main Street from Wall Street – to protect people who entrusted their savings to commercial banks from having their money misappropriated.

Glass-Steagall’s larger goal was to end the giant Ponzi scheme that had overtaken the American economy in the 1920s and led to the Great Crash of 1929.

Americans had gotten rich by speculating in stocks and various kinds of exotica (roughly analogous to crypto). The value of these risky assets has risen only because an increasing number of investors have invested in them.

But at some point, the Ponzi schemes crumble under their own weight. When the overthrow occurred in 1929, it plunged the nation and the world into a Great Depression. The Glass-Steagall Act was a way to restore stability.

But in the 1980s, America forgot the financial trauma of 1929. As the stock market soared, speculators noticed that they could make a lot more money if they could gamble with the money of the others – as speculators did in the 1920s. They pushed Congress to deregulate Wall Street, arguing that the US financial sector would otherwise lose its competitive position against other financial centers of the world.

Eventually, in 1999, Bill Clinton and Congress agreed to drop what was left of Glass-Steagall.

As a result, the US economy has once again become a betting parlour. Inevitably, Wall Street suffered another near-death experience from excessive gambling. His Ponzi schemes began to unravel in 2008, just as they had in 1929.

The difference was that this time the US government bailed out the biggest banks and financial institutions. The wreckage was contained. Yet millions of Americans have lost their jobs, savings, and homes (and not a single bank executive has been jailed).

Which brings us to the crypto crash.

Current Securities and Exchange Commission (SEC) Chairman Gary Gensler has described cryptocurrency investments as “rife with fraud, scams and abuse.” In the murky world of crypto DeFi, it’s hard to know who is providing money for loans, where the money is flowing, or how easy it is to trigger currency crashes.

There are no standards for risk management or capital reserves. There are no transparency requirements. Investors often don’t know how their money is managed. Deposits are not insured. We are back to the finances of the Wild West of the 1920s.

Prior to the crypto crash, the value of cryptocurrencies had steadily risen attracting ever-increasing numbers of investors and large sums of money from Wall Street, as well as celebrity endorsements. But, again, all Ponzi schemes eventually collapse. And it looks like crypto is rocking.

Why is this market not regulated? Mainly because of heavy lobbying from the crypto industry, whose kingpins want the Ponzi scheme to continue.

The industry invests a lot of money in political campaigns.

And he’s hired dozens of former government officials and regulators to lobby on his behalf — including three former Securities and Exchange Commission chairmen, three former Commodity Futures Trading Commission chairmen, three former U.S. senators, a former head of White House cabinet. , and former chairman of the Federal Deposit Insurance Corporation.

Former Treasury Secretary Lawrence Summers advises crypto investment firm Digital Currency Group Inc and sits on the board of Block Inc, a fintech company that invests in cryptocurrency payment systems.

If we should have learned anything from the crashes of 1929 and 2008, it is that the regulation of financial markets is essential. Otherwise, they turn into Ponzi schemes that end up leaving small investors with nothing and destabilizing the whole economy.

It’s time for the Biden administration and Congress to regulate crypto.

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