The most expensive advertising on earth appears during the United States’ Super Bowl. In the 2022 contest between the Cincinnati Bengals and Los Angeles Rams football teams, a 30-second spot cost as much as $US7 million, a price point traditionally the preserve of major banks, insurers and multinationals. This year there was a new heavyweight alongside them. Cryptocurrency exchanges bought so many ads that the game was nicknamed “the Crypto Bowl”.
LeBron James fronted for Crypto. com. Larry David spruiked FTX. Crypto sponsorship deals were already well-established in sport – the Australian Football League announced a $25 million deal with Crypto.com in January – but with its takeover of the Super Bowl, the industry summited a peak.
There were objections. The ads seemed crassly commercial, even for an event famous for crass commercialism. There was the implication that crypto markets weren’t just going mainstream, but were on the hunt for “dumb money”, low-information investors whose capital is needed to shore up dubious assets.
One worried observer was Gary Gensler, the head of the US Securities and Exchange Commission (SEC), the most powerful financial regulatory body in the world. He said later that the spectacle reminded him of the lead-up to the 2008 global financial crisis, when a subprime mortgage lender that advertised during the Super Bowl then went belly up. It was an unflattering comparison, made as a prelude to proposed regulation. The SEC would step in to protect investors, capital markets, and the wider financial system – eventually.
Other countries had already acted. In 2021, China outlawed cryptocurrency trading and mining altogether, ending the world’s largest crypto-mining industry almost overnight. Authorities cited environmental concerns when announcing the shutdown. By then, dozens of countries already had total or de facto bans on crypto.
Their leaders feared not only illicit use, but systemic risk: if enough money flowed into cryptocurrency, it could destabilise traditional banking systems, especially in smaller nations. At scale, they might even dilute governments’ ability to set fiscal policy. On this, crypto’s critics and its hardcore libertarian defenders agreed, divided only about whether that was a good thing or not.
To the wary, stablecoins – crypto tokens that are supposed to be pegged to traditional currencies – looked especially ominous. One finance academic, Rohan Grey, was so concerned about the risks of this “shadow money” that he left Australia and moved to the US, where he is now assistant professor at Willamette University College of Law. In 2020 he co-authored the Stablecoin Tethering and Bank Licensing Enforcement (STABLE) Act, a piece of regulatory architecture sponsored by three congressional Democrats. It has languished, despite the President’s Working Group on Financial Markets highlighting the need for rules governing stablecoins’ use.
The stablecoin act is intended to “protect consumers from the risks posed by emerging digital payment instruments”. According to Grey and his co-authors, “digital currencies whose value is permanently pegged to or stabilised against a conventional currency … pose new regulatory challenges while also representing a growing source of market, liquidity and credit risk”.
The stablecoin collapses in May this year were predictable, he says.
“The reason that crypto was even able to do what it’s done to get into this space is because we had a gaping hole in our banking regulation system in the US. We didn’t have a clear definition for what shadow money was.”
Grey’s criticisms have made his name as a crypto adversary, and some of his disdain is forceful, especially for the more environmentally destructive tokens. “I have no problem saying we should ban that on environmental grounds,” he says. “It’s indefensible, it’s disgusting.”
Nevertheless, he believes cryptocurrencies do have social value. He sees them as the latest in a long tradition of experimental currencies that have privacy and innovation advantages.
“I don’t know of a very clear way to distinguish between those positive [tokens] and not without also keeping some space open for things like bitcoin,” he says. He also believes that the post-GFC period was a major missed opportunity to create public digital money.
For Grey, the priority is not to repeat the mistakes of 2008. “We saw that little acronym IBG, YBG – I’ll be gone, you’ll be gone.” Neither buyer nor seller will have accountability, and the much-distrusted government will have to come and clean up the mess. “They love all of the protections and guarantees the state provides for their ability to make money. Are they going to be millionaires or billionaires while everyone else is poor? There’s a sense in which none of those actors are going to be held accountable on the way down. And so if we don’t stop it on the way up, it just won’t be stopped.”
Pro-regulation voices have gained ground within the crypto movement itself. Caroline Bowler, chief executive of the Melbourne-based cryptocurrency exchange BTC Markets, is known for trying to bridge crypto markets and traditional finance. BTC Markets performs due diligence – it has been called a “sheriff in the wild west” – and refuses to list all but a few of the 19,000-odd crypto tokens now available. Like Grey, the GFC was formative for her. “I saw what happened when people operated in a way that was opaque. I saw the contagion risk,” she says. “Being at the pointy end of the stick has really influenced my view when it comes to investor protection.”
Opacity is notoriously bad in crypto markets – it is common for exchanges to trade while illiquid, or bet against their own clients. When liquidators examined the failed Australian crypto exchange myCryptoWallet, they found it had been trading while insolvent for three years.
“We do our utmost to prevent or stop instances of market manipulation,” Bowler says. “But there is no one for me to report that to. And there is no one asking me to do that. I’m not regulated, because crypto is not a financial product. So market manipulation could be occurring on other exchanges. And there’s nothing. There’s no fallback for the investor – no one is responsible for that. That’s not right.”
It’s an understatement to say that self-regulation has not been a success so far. Blockchain Australia has a voluntary code of conduct, which reflects best practice. Of the 450 or so registered digital currency exchanges locally, only three are compliant with it.
“The industry in Australia has had a chance to self-regulate, and it hasn’t done so,” Bowler says. She believes it is inevitable that legislated regulation is coming.
“You cannot deal with assets that have that value, and not expect to be regulated. There was too much – euphoria? – in the market over the past two years.”
Government regulation is on the cards internationally. Twenty-seven EU member states have agreed on crypto rules that will come into effect in 2024, and the United Kingdom will likely follow their lead. In early July, the US Treasury tipped that it would begin work on an international regulatory framework. Bitcoin may be an exception – it is too mature and diffuse to regulate easily – while other tokens, exchanges, platforms, could be brought to heel.
“It’s only going to get mainstream if it’s properly regulated,” says Greg Medcraft, the former director for financial and enterprise affairs at the OECD. Once legislation is in place, the next challenge will be harmonisation of those regulations around the world, to avoid any “Cayman Islands of crypto” coming into existence.
Such a move would mark twilight in the shitcoin casino, and it is unlikely there will still be 19,000 different tokens in the aftermath. The boosters have often said cryptocurrencies never die – but regulation could be the end of the market as we’ve known it.
Now, many countries are in the process of minting their own digital currencies. China launched a digital version of the yuan in 2020 in a program limited to a small number of cities. In that year, around 35 countries had digital public money trials; by 2022, more than 100 nations had similar pilot programs. US President Joe Biden issued an executive order in March placing “the highest urgency on research and development efforts into the potential design and deployment options” of an American central bank digital currency (CBDC).
And in August, the Reserve Bank of Australia announced a CBDC scheme that aims to carve out space for a digital version of the Australian dollar.
Crypto’s rebellion against fiat currency may end in a truce, and finally an alliance.
This is the final in a four-part series on cryptocurrency.
Read part one: How the crypto market started.
Read part two: The dark side of the crypto market.
Read part three: The enormous environmental cost of crypto mining.
This article was first published in the print edition of The Saturday Paper on August 13, 2022 as "The future of money".
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