Regulatory Crackdown in Wake of FTX Scandal Would Erode Liberties Without Addressing Demand for New Currencies: Experts

The collapse of cryptocurrency exchange FTX, and the worldwide outcry over the billions of dollars wiped off the platform, are likely to trigger a massive regulatory reaction that would further erode citizens’ economic freedoms without addressing the issues that fostered demand for an alternative to the fiat dollar, economists have told The Epoch Times.

FTX has filed for bankruptcy protection, Bankman-Fried has stepped down from his role as CEO, and John J. Ray III, the former CEO of Enron, has taken over the insolvent company with a plan to sell it off if a successful restructuring is impossible. An estimated 1 million customers and other investors are facing total losses of billions of dollars.

Wayne Davis, a partner at the law firm Tannenbaum Halpern Syracuse & Hirschtritt in New York, drew a parallel with one of the most notorious cases of fraud in the history of finance, that of the Bernard L. Madoff, whose Ponzi scheme bilked some 4,800 clients of $64.8 billion. In both cases, clients were insufficiently attentive to the lack of internal controls, he suggested.

“Madoff comes to mind. Perhaps not the same criminal intent components, but there are certainly similarities as far as investor/customer enthusiasm notwithstanding signs of lax compliance and risk management engagement,” Tannenbaum told The Epoch Times.

Other observers see parallels in earlier events in the development of banking and currencies. Charles Steele, chair of the department of economics, business, and accounting at Hillsdale College in Michigan, said that the blow-up of FTX reminds him of the first stock market bubble and financial crisis to afflict the world, namely the collapse of France’s Banque Royale in 1720.

“Scotsman John Law set up a central bank for the French monarchy that began paying enormous returns on its shares and its sister Mississippi Company. It was heralded as a great triumph of new financial technology, a nearly miraculous breakthrough, but in fact, it was effectively what we now call a Ponzi scheme,” Steele told The Epoch Times.

“While this thought does not originate with me, it is clear that crypto is not a currency, if one attribute of a currency is a stable value. The collapse of FTX certainly puts the entire asset class under review and question and may lead to calls for governmental regulation,” Guernsey said.

“I expect that this debacle will lead to greatly increased federal regulation of cryptocurrencies,” Steele said.

In Steele’s view, the fiasco is likely to speed up the crafting and implementation of central bank digital currencies (CBDC). Steele noted that the Federal Reserve Bank of Boston is collaborating with the Massachusetts Institute of Technology on a joint study, Project Hamilton, whose objective is to devise a CBDC for the United States.

While ignored by many people, this is one of the most potentially concerning recent developments given the unprecedented powers that it stands to place in the hands of a central regulatory authority, he said. While some might initially welcome a CBDC, it could have unforeseen consequences and ultimately could help extend the role of government into people’s lives in ways to which they are so far unaccustomed.

“I think a CBDC is very dangerous, because it would enable a central bank or government to monitor, control, and record every exchange made with the currency. If, for example, a government decided it did not want citizens buying, say, firearms, or perhaps donating funds to a political candidate, the central bank could prevent the transaction. Alternatively, it could have a permanent record of a citizen’s purchases and use these to establish a social credit score for the person,” Steele said.

“In this way, a CBDC could become the ultimate tool of social engineering and tyranny. A true cryptocurrency keeps transactions anonymous, which is one of its great benefits. Governments tend to dislike tools that give citizens such privacy,” he added.

That’s the view of Brian Domitrovic, a professor of economic history at Sam Houston State University, who sees negative long-term consequences to the country’s abandonment of the gold standard in 1971.

“I don’t think there’s any kind of broad popular support for a fiat dollar, a non-gold dollar. There hasn’t been since 1971. A lot of popular dissatisfaction with this has been very clearly expressed,” Domitrovic told The Epoch Times.

Despite the differences, both currencies have the effect of eroding centralized power and oversight by making institutions such as the Federal Reserve less integral to the functioning of the economy, Domitrovic said.

“Bitcoin aspires to mimic gold in many respects. This is what you had when money was not a creation of the Federal Reserve,” he added.

Much of today’s demand for bitcoin and kindred currencies flow from a widespread desire to go back to how things were before 1971, Domitrovic argued.

“Before 1971, the United States led the world in becoming the greatest economy ever, with hundreds of millions of people living at high levels of prosperity. There is a very strong reason why people associate the pre-1971 period with a magnificent achievement economically,” he added.

In this analysis, the federal government has sought to maintain centralized oversight over the economy and the level of prosperity attainable by citizens partly by not allowing crypto to compete with the fiat dollar.

“Even if there is fraud, I’m still going to lay a lot of the blame at the feet of the government and the official definition of policy, because they’re not taking crypto as seriously as they should. They consider it non-money,” he said.

Domitrovic sees stiff resistance on the part of Washington’s policy elites toward going back to the state of affairs that prevailed up until 1934, when it was common for private banks to issue currencies not subject to taxation.

“A majority of U.S. dollars from 1862 to 1934 were produced privately. Look at currency from the 1920s, there’s the name of a bank on it. It wasn’t taxed, and you didn’t have to calculate where you acquired it and where you sold it. That’s the way things worked going back to 1792 when the U.S. dollar was established,” Domitrovic said.

By taxing crypto transactions and refusing to acknowledge the legitimacy of bitcoin, the government has helped foster a shadow industry where reckless players and fraudsters like Bankman-Fried proliferate, Domitrovic believes.

“I can see scenarios where the government wants to see if bitcoin will embarrass itself out of existence. But they’re not addressing the fundamental issue, that there’s mass dissatisfaction with the non-gold fiat collar. Good policy would take that seriously,” said Domitrovic.

The Epoch Times has reached out to FTX for comment.