Perhaps the sun is setting on the cryptocurrency craze. If you are an investor or even just a curiosity seeker on the fringes of this financial sector, you may want to prepare for its demise.

Just in the past few weeks, market regulators and banks in the United States have tightened the screws on cryptocurrency-related companies. Legislative initiatives in Congress aimed at liberalizing rules for cryptocurrency promoters appear to be losing steam.

The entire cryptocurrency market, from the leading cryptocurrency Bitcoin to cryptocurrencies such as Dogecoin and obscure tokens such as Stellar and Cardano, has experienced an extended downturn.

The cryptocurrency market capitalization, which peaked at over $3 trillion in late 2021, is now estimated at around $800 billion, which means huge losses for late-stage investors. (Some cryptocurrencies have risen recently, but benchmark bitcoin is still down more than 60% from its November 2011 peak.)

To many cryptocurrency critics, these developments reflect the gravitational effect of a market characterized by “frequent instances of operational failures, market manipulation, fraud, theft, and fraud,” in the words of the US Treasury Department. A consumer advisory report was released last September.

“There isn’t, and we have a lot of history to prove it,” Lee Rayners, a crypto expert at Duke and a former regulatory official at the Federal Reserve Bank of New York, told the Senate Banking Committee. Tuesday session.

Unlike stocks and bonds, which give owners a claim to the earnings of the issuers, or precious metals, which generally have intrinsic industrial or commercial value, cryptocurrencies represent neither ownership nor a claim to economic productivity.

Given that the first bitcoin transaction occurred in 2009, Reiners notes that despite a “14-year track record to look at,” no one has defined what good crypto is, except for something people can buy only when they expect they can. Sell ​​it to someone else at a higher price in the future – which is often described by the “bigger fool” theory.

US banking regulators have not ignored this reality. in Joint statement issued on January 3The Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency all made one list of the biggest cryptocurrency problems, many of which paralleled concerns raised by the Treasury Department.

They cited “fraud and fraud risks,” “inaccurate or misleading representations and disclosures,” “unfair, deceptive, or abusive” practices and risks of “cyber-attacks, service disruptions, lost or withheld assets, and illicit financing.”

The implicit aim of the joint statement was to warn regulated banks and their customers that they should probably steer clear of cryptocurrency at all costs.

The immediate impetus for the change of opinion in Washington may be November FTX breakdown, a cryptocurrency company whose founder, Sam Bankman-Fried, has been a prominent advocate for looser regulations on crypto companies. Bankman-Fried is released on bail while awaiting trial on criminal charges.

However, the FTX bankruptcy was only one of a series of crypto company failures through 2022, and a harbinger of more bankruptcies. Perhaps most importantly, many of the operational deficiencies alleged to exist in FTX’s operations are common to the field, including inadequate record-keeping and security arrangements, and commingling of client and corporate assets.

It is likely that consumer interest in cryptocurrency will wane even without the collapse of FTX. Last year’s Super Bowl telecast was filled with expensive commercials from crypto companies featuring celebrities like Matt Damon and Larry David. Supernovas like the old-fashioned cryptocurrencies of 2022 are always destined to fizzle out to some degree; Super Bowl this year It was free of encryption.

But in recent weeks and months, US regulators have taken aggressive steps to immunize the larger banking and financial system against pollution from the failure of crypto companies.

In January, the Federal Reserve He refused a request from Custodia Bank for membership in the Federal Reserve System. Custodia, which is chartered by Wyoming, aims to issue its own cryptocurrency. “The company’s new business model and proposed focus on crypto assets present significant safety and health risks,” the Fed said.

Last week, New York state banking regulators ordered Paxos Trust to stop issuing cryptocurrency tokens with a brand associated with France-based Binance, the world’s largest crypto exchange, due to “several unresolved issues” related to the two companies’ relationship. The SEC also informed Paxos that it may face a lawsuit from the US Securities and Exchange Commission for selling unregistered securities – cryptocurrency tokens.

Also last week, the SEC forced cryptocurrency exchange Kraken to stop marketing a so-called staking-as-a-service program in which it advertised financial returns of up to 21% for investors who moved their crypto assets to Kraken. The company paid $30 million to settle with the Securities and Exchange Commission, without acknowledging the agency’s charge that it was marketing an illegal security device.

Shills for crypto, including those on Capitol Hill, usually make two main arguments. One is that cryptocurrency represents a “financial innovation” that we are stifling at our peril. The other is that it is a way to give segments of society that have traditionally been excluded from the financial system, such as “unbanked” minorities, access to financial services that others enjoy.

Both are bald. Let’s take them in order.

At a hearing Tuesday, senior committee member Tim Scott (RS.

Scott is seconded by JD Vance (R-Ohio), a venture capitalist in his outside life, who asks “how people were describing the Internet in the ’70s and ’80s…it destroyed a lot of the upside that’s happened over the last three decades.” He asked how cryptocurrencies are now being regulated “in a way that protects the positive aspects of the technology right now.”

The flaws in this argument should be seen immediately. The first is that the merits of any given innovation do not validate any other claimed innovations. (In fact, some “innovations” have qualities that society could have done without, such as the technological innovations that gave us thermonuclear weapons.)

Another is that talking about cryptocurrency “earnings” means assuming facts that are not in evidence, as no one has made a convincing argument for cryptocurrencies as a useful innovation — except as a tool for criminal activity.

At the hearing, Committee member Elizabeth Warren (D-Mass) stated “international drug traffickers who made over $1 billion through cryptocurrency, … North Korean hackers, who stole $1.7 billion and funneled that money toward their nuclear program.. .and ransomware attackers who took in nearly $500 million.”

It concluded that “the cryptocurrency market accounted for $20 billion last year in illicit transactions. And That’s just the part we know.“

As for the alleged inclusiveness of cryptocurrency, this is an illusion. The most cited statistic comes from A survey conducted by Charles Schwab & Co. of 2,057 American adults, which found that 25% of black investors will own digital currencies in 2022, compared to just 15% of white investors. (Yesha Yadav of Vanderbilt Law School, witness in Senate hearing, by mistake He asserted that these numbers apply to all Americans, black or whitenot just investors.)

One might wonder if Schwab’s numbers are at all reasonable, but it is important to note that the median income of black respondents was $99,000 and for white respondents, $106,000.

These are not the unbanked Americans whose financial ambitions are supposed to be liberated by cryptocurrency. “What the unbanked really need are simple, safe, and inexpensive ways to save their money, as well as convenience,” said Tonantzin Carmona of the Brookings Institution. reported in oct.

Unfortunately, cryptocurrency transactions tend to be the exact opposite — “slow, expensive, and inefficient,” Carmona noted — and riddled with “many hidden fees.”

Carmona’s 2019 FDIC survey reported that 29% of unbanked respondents blamed their situation on not having enough money to meet minimum balance requirements. Using a flyer about highly volatile cryptocurrencies is not the most reliable way to bridge the gap.

One should expect the cryptocurrency industry to fight regulation with a force that could buy millions of dollars in lobbying expenses – He spent $9 million on the impact on Congress in 2021, the most recent year for which the numbers were compiled.

However, the lobbyists’ narrative is bogus. The Crypto Big blames the serial bombings of crypto firms on the failure of the SEC and CFTC to provide the sector with “regulatory clarity.”

Scott wrote about this point in his opening statement on Tuesday. “The organizers allowed activity in this space without providing clear rules of the road,” he said. “Had the SEC offered anything besides hostility to the cryptocurrency industry, we might have been able to save investors from losing billions of dollars on FTX” and other such disasters.

The truth is, the agencies couldn’t be clearer about where Big Crypto is breaking the rules.

Since 2013, the SEC has filed 127 enforcement actions in the crypto space of one form or another without losing even once in court. “There are time-tested rules,” Securities and Exchange Commission Chairman Gary Gensler told Bloomberg Television Monday. But “this is a highly incompatible domain.”

What crypto companies want is a “giant hole written in the law,” Warren said at the hearing. She’s right. Recent enforcement actions indicate that regulators are less inclined than ever to help them find it.

Without a loophole that grants these companies an exemption from the rules that every other financial intermediary must comply with, cryptocurrencies are likely to wither and die. This will be the best protection for consumers against losing their shirts to cryptocurrency scams.