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Cryptocracy: all Ponzi schemes overturn in the end | Robert Reich

OOne week ago, when cryptocurrency prices fell, Celsius Network – an experimental cryptocurrency bank with more than one million customers who have emerged as a leader in the murky world of decentralized finance, or DeFi – announced that it was freezing withdrawals “due to extreme market conditions “.

Earlier this past week, Bitcoin fell 15% over 24 hours to its lowest value since December 2020. Last month TerraUSD, a stack coin – a system that was supposed to work much like a regular bank account, but which was only supported by a cryptocurrency called Luna – collapsed and lost 97% of its value in just 24 hours, apparently ruining some investors’ savings.

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

Glass-Steagall’s larger purpose was to put an end to the gigantic Ponzi scheme that had bypassed the US economy in the 1920s and led to the Great Depression in 1929.

Americans had become rich by speculating in stocks and various types of exotic things (roughly analogous to crypto). The value of these risky assets rose solely because an increasing number of investors put money into them.

But at some point, the Ponzi scheme falls short of its own weight. When the overthrow occurred in 1929, it threw the nation and the world into a great depression. The Glass-Steagall Act was a means of restoring stability.

But in the 1980s, America forgot the economic trauma of 1929. As the stock market rose, speculators realized that they could make much more money if they could gamble with other people’s money – as speculators did in the 1920s. They pressured Congress to deregulate Wall Street, claiming that the US financial sector would otherwise lose its competitive position vis-à-vis other financial centers around the world.

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

As a result, the US economy once again became a tipping point. Wall Street inevitably suffered a near-death experience from excessive gambling. The Ponzi schemes began to collapse in 2008, just as they had in 1929.

The difference was this time the US government rescued the largest banks and financial institutions. The wreck was kept inside. Yet millions of Americans lost their jobs, their savings, and their homes (and not a single bank manager went to prison).

Which brings us to the cryptocurrency.

The current head of the Securities and Exchange Commission (SEC), Gary Gensler, has described cryptocurrency investments as “fraught with fraud, deception and abuse”. In the scary world of crypto-DeFi, it is difficult to know who is lending money, where the money is flowing, or how easy it is to trigger currency devaluations.

There are no standards for risk management or capital reserves. There is no requirement for transparency. Investors often do not know how their money is handled. Deposits are not insured. We are back to the economy of the Wild West in the 1920s.

Before cryptocurrency, the value of cryptocurrencies had continued to rise by attracting an ever-increasing number of investors and some big Wall Street money, along with celebrities. But again, all Ponzi schemes will eventually collapse. And it looks like crypto is now overturning.

Why is this market not regulated? Mainly due to intensive lobbying from the crypto industry, if the kingpins want the Ponzi scheme to continue.

The industry is pouring huge amounts of money into political campaigns.

And it has hired a number of former officials and regulators to lobby on its behalf – including three former Securities and Exchange Commission executives, three former Commodity Futures Trading Commission executives, three former U.S. senators, a former White House chief of staff, and the former chairman of the Federal Deposit Insurance Corporation.

Former Chief Financial Officer Lawrence Summers advises the crypto-investment company Digital Currency Group Inc and sits on the board of Block Inc, a financial technology firm that invests in cryptocurrency payment systems.

If we should have learned anything from the crashes in 1929 and 2008, it is that regulation of the financial markets is crucial. Otherwise, they become Ponzi schemes that ultimately leave small investors with nothing and destabilize the entire economy.

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

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