Last November, the global cryptocurrency market was worth $3 trillion. Now, it’s below $1 trillion. Bitcoin alone has plummeted more than 70 percent since November 9.
Many Americans have lost their shirts. So why isn’t crypto regulated like other financial assets?
First, some history.
Eighty nine years ago, the Banking Act of 1933, also known as the Glass-Steagall Act, was signed into law by Franklin D. Roosevelt. It 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 gambled away. Glass-Steagall’s larger purpose was to put an end to the giant Ponzi scheme that had overtaken the American economy in the 1920s and led to the Great Crash of 1929.
Americans had been getting rich by speculating on shares of stock and various sorts of exotica (roughly analogous to crypto). As other investors followed them into these risky assets, their values increased. But at some point, Ponzi schemes topple under their own weight. When the toppling occurred in 1929, it plunged the nation and the world into a Great Depression. The Glass-Steagall Act was a means of restoring stability.
It takes a full generation to forget a financial trauma and allow the forces that caused it to repeat their havoc.
By the mid-1980s, as the stock market soared, speculators noticed they could make lots more money if they could gamble with other people’s money, as speculators did in the 1920s. They pushed Congress to deregulate Wall Street, arguing that the United States financial sector would otherwise lose its competitive standing relative to other financial centers around the world.
In 1999, bill clinton and Congress agreed to say what remained of Glass-Steagall. Supporters hailed the move as a long-overdue demise of a Depression-era relic. Critics (including yours truly) predicted it would release a monster.
The critics were proven correct. With Glass-Steagall’s repeal, the American economy once again became a betting parlor.
Inevitably, Wall Street suffered another near-death experience from excessive gambling. Its Ponzi schemes began toppling in 2008, just as they had in 1929. The difference was that the US government bailed out the biggest banks and financial institutions, with the result that the Great Recession of 2008-09 wasn’t nearly as bad as the Great Depression of the 1930s. Still, millions of Americans lost their jobs, their savings, and their homes.
In the wake of the 2008 financial crisis, a new but watered-down version of Glass-Steagall was enacted—the Dodd-Frank Act—which has been further diluted and defanged by Wall Street lobbyists.
Which brings us to the crypto crash.
The current chair of the Securities and Exchange Commission, Gary Gensler, has described cryptocurrency investments as “rife with fraud, scams, and abuse.” It’s difficult to know who provides money for loans, where the money flows, or how easy it is to trigger currency meltdowns. There are no standards for risk management or capital reserves, and no transparency requirements. Deposits are not insured. We’re back to the Wild West finances of the 1920s.
In the past, the value of cryptocurrencies kept rising by attracting an ever-growing range of investors and some big wall street money, along with celebrity endorsements. But, as I said, all Ponzi schemes topple eventually.
This market isn’t regulated because of intensive lobbying by the crypto industry, whose kingpins want the Ponzi scheme to continue. The industry has poured huge money into political campaigns. And it has hired scores of former government officials and regulators to lobby on its behalf, including three former chairs of the Securities and Exchange Commission, three former chairs of the Commodity Futures Trading Commission, three former US senators, at least one former White House chief of staff, the former chair of the Federal Deposit Insurance Corporation, and a former Secretary of the Treasury.
In his 1955 book The Great Crash 1929, Harvard professor John Kenneth Galbraith introduced the term “bezzle” (derived from embezzlement). Galbraith noted that the bezzle in a financial system grows whenever people are confident about the economy, and reveals itself when confidence ebbs.
Crypto is pure bezzle, as is now being revealed. If we should have learned anything from the crashes of 1929 and 2008, it’s that regulation of financial markets is essential. Otherwise, they turn into Ponzi schemes filled with bezzle, leaving small investors with nothing and endangering the entire economy.
It’s time for the Biden administration and Congress to stop the crypto bezzle.
Robert B. Reich is an American political commentator, professor and author. He served in the administrations of Presidents Gerald Ford, Jimmy Carter and Bill Clinton. Reich’s latest book, The System: Who Rigged It, How We Fix Itis out now.
The views expressed in this article are the writer’s own.