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“But what is dogecoin?” Elon Musk, the self-avowed “technoking” and founder of Tesla, was asked repeatedly to comic effect during his cameo on Saturday Night Live last week. American comedy shows are not the only ones having a hard time defining what crypto assets are. Dogecoin is perhaps their most bizarre manifestation: starting as a gimmick, its value has surged more than 10,000 per cent in the past year, only to plummet by more than 30 per cent while Musk, an enthusiastic proponent, was on air joking it was a “hustle”.
If crypto assets have reached the mainstream — or at least primetime television — it is reasonable to ask whether they need to be better regulated. Ironically for a decentralised ecosystem that came into being as a snub to traditional finance, regulation would confirm its coming of age.
Gary Gensler, the new chair of the US Securities and Exchange Commission, has asked lawmakers to explore whether the markets watchdog needs new legislation to tackle the crypto boom, which has been further boosted by institutional investors opening crypto desks, ostensibly as a hedge against inflation. Laws dating back to the 1930s may not be up to the task.
There are parallels with the frenzy in trading “meme” stocks this year. Technology has upended finance, and social media is encouraging a new breed of retail investor, frustrated with puny interest rates, through the gamification of trading. The question is whether these new investors — many of whom are aware of or indeed attracted by the highly volatile nature of crypto — need new protections.
Gensler is right to focus on market manipulation, and deceitful marketing. There are also valid concerns about lax money-laundering controls. The problem is that the normal regulatory anchors — geography and product — are loose when it comes to crypto. That matters when regulators tend to be siloed into supervisors of commodities or securities or money. The nomenclature does not help: central bankers, developing their own digital coins, prefer the term crypto assets rather than cryptocurrency. The SEC has acted where crypto tokens fall within the legal definition of a security. But the watchdog ruled that bitcoin — which accounts for about half the $2tn crypto market — is not a security.
What is clear is that international co-ordination is needed. Investors are based all over the world and crypto exchanges are peripatetic: Coinbase is shuttering its headquarters, while Binance, the exchange that raised the German markets watchdog’s hackles over whether the tokens it offers are actually securities that need a prospectus, claims it has no official main office.
International accord is hard and slow because of differing approaches to crypto: China is draconian, offshore centres such as Gibraltar are welcoming, and the US, UK and Europe sit in between. In 2018, the Financial Stability Board of G20 policymakers and finance ministers pledged scrutiny. Mark Carney, the FSB’s then chair, argued that crypto exchanges should be brought within “the regulatory tent”. Not much has happened since.
Also needed is better oversight of how the crypto ecosystem has an impact on our actual environment. Mining bitcoin can use up vast amounts of energy, much of it the cheaper, fossil-fuel variety. There should not have to be a trade-off between the so-called democratisation of finance and the climate emergency.
A similar balance must be sought by lawmakers weighing new markets rules. Investors do not want the stability of the graveyard, but neither do they deserve a “hustle”.