Why Contentious Crypto Needs Traditional Rules, Not a New Name – Chicago Tribune

These are tough times for financial markets, with a series of bank failures providing a nasty shock at a time of high inflation.

An unlikely winner from the market turmoil: cryptocurrencies. The price of these digital assets has risen in recent weeks as traders, spooked by an apparent upheaval in the bank-dominated financial system, have offered an alternative known for its outsider status.

Here’s the rich irony for those who remember the early days of crypto: Even as crypto prices soared, cryptocurrency companies in the US were scrambling to become insiders in the financial industry, embracing traditional business models that not long ago they were bent on disrupting.

For a sign of the times, consider the standard attire at the Futures Industry Association’s annual conference earlier this month at a posh Florida resort.

Last year, youthful attendees in black T-shirts, shorts and hoodies signaled that outsiders were indeed storming the gates of Boca Raton. This year, crypto operators have dusted off their blazers and trousers, talking about the benefits of registering and being regulated like other trading firms.

“The crypto people are coming to the traditional model,” observed Walt Lukken, who heads the trade association. “There’s a reason the traditional model exists.”

Crypto has a long way to go before anyone would call it traditional, but the change in attitudes is welcome news for Chicago and other global trading centers. As this site has noted, stronger regulations and greater participation by mainstream financial firms could help this promising marketplace achieve its potential — minus the shady behavior that has given it such a bad name that some crypto operators want to drop “crypto” in favor of ” blockchain” or some other less tainted name for their industry.

Cryptocurrencies are digital files that can be used as money. They rely on blockchain, a digital ledger that permanently records transactions. The smart technology enables participants to trade with each other, person-to-person, without a central counterparty to guarantee trades, as in Chicago’s financial markets.

Rebranding this industry will be tough as the bad news just keeps coming. First, the banking crisis that struck in recent weeks took lenders with heavy exposure to crypto, notably Signature Bank and Silvergate Bank, until recently among the industry’s most aggressive financiers.

Even bigger looms Sam Bankman-Fried, the one-time face of the business whose FTX exchange imploded in November, ending a disastrous 2022 for the crypto industry. The criminal case against “SBF”, as he is popularly known, looks worse with each passing day as additional details provide ammunition to those who dismiss not only SBF and FTX, but the entire industry as one big, unregulated scam. SBF has denied criminal guilt and said that he is innocent of criminal offences.

Federal prosecutors last month brought additional charges against SBF, who faces decades in prison if convicted, based on the enormity of FTX’s losses. He and a handful of alleged accomplices are accused of stealing billions in customer funds.

Creditors learned in recent days that the dozens of companies that make up FTX had a staggering deficit of $6.8 billion when they filed for bankruptcy last year, with $4.8 billion in assets against $11.6 billion owed to customers, suppliers and others that are unlikely ever to be made whole.

FTX further revealed that SBF received $2.2 billion in payments and loans before the company failed, while several other top executives paid out hundreds of millions. One of his most prominent lieutenants, Caroline Ellison, who ran the tangled crypto hedge fund Alameda Research that is said to have been a conduit for siphoning client funds, received $6 million.

That $6 million is a big sum, of course, but many women working in finance will note that even at an upstart that claims to be progressive, the highest-ranking female executive got far less than the guys who were supposedly her peers. Ellison has signed a plea deal and is expected to testify for prosecutors in the criminal case currently scheduled for October.

Given the catastrophic backdrop, how can the price of crypto rise? Many market veterans believe that those who continue to trade in arenas where client accounts can go “poof” (no FDIC riding to the rescue) deserve the losses that may come. Furthermore, while prices have shot up, crypto markets are not as deep and liquid as they were a year ago, indicating that participants have scaled back their activity.

Still, crypto isn’t dead, and in our view, that’s a plus. While some would celebrate if this economic infant suffocated in bed, we see potential. The technology underlying the industry can, for example, transform international payment systems, and bring greater efficiency to the fore.

We root for crypto to embrace fundamental rules that are second nature to other financial operators – namely, don’t play with customer money – and continue working to earn a place in the financial mainstream.

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