Crypto Crash: All Ponzi schemes eventually collapse

One week ago, when cryptocurrency prices plummeted, Celsius Network, an experimental cryptocurrency bank with more than a million customers that has become a leader in the murky world of decentralized finance, or DeFi, announced that it was freezing withdrawals “due to extreme market conditions.” ”.

Earlier last week, Bitcoin fell 15% in 24 hours to its lowest value since December 2020. Last month, TerraUSD, a stable currency, a system that was supposed to work a lot like a bank account conventional, but it was only backed by a cryptocurrency called Luna: it collapsed, losing 97% of its value in just 24 hours, seemingly destroying the life savings of some investors.

Eighty-nine years ago, Franklin D Roosevelt signed the Banking Act of 1933, also known as the Glass-Steagall Act. He separated commercial banking from investment banking (Main Street Wall Street) to protect people who entrusted their savings to commercial banks from gambling their money.

Glass-Steagall’s greatest purpose was to put an end to the giant Ponzi scheme that had overtaken the American economy in the 1920s and led to the 1929 Great Crack.

Americans had been getting rich speculating with stock stocks and various types of exotics (roughly analogous to crypto). The value of these risky assets increased only because a growing number of investors put money into them.

But at some point, Ponzi schemes fall by their own weight. When the overthrow occurred in 1929, it plunged the nation and the world into a Great Depression. The Glass-Steagall Act was a means of restoring stability.

But in the 1980s, America forgot about the financial trauma of 1929. As the stock market soared, speculators realized that they could make a lot more money if they could play with other people’s money, as they did. speculators in the 1920s. They pushed Congress to deregulate Wall Street, arguing that otherwise the U.S. financial sector would lose its competitive position relative to other financial centers around the world.

Finally, in 1999, Bill Clinton and Congress agreed to abandon what was left of Glass-Steagall.

As a result, the US economy once again became a gambling hall. Inevitably, Wall Street suffered another near-death experience due to excessive gambling. Their Ponzi schemes began to fall apart in 2008, as they had done in 1929.

The difference was that this time the US government rescued the largest banks and financial institutions. The remains were contained. Still, millions of Americans lost their jobs, savings, and homes (and no bank executives went to jail).

Which brings us to the cryptographic crack.

The current chairman of the Securities and Exchange Commission (SEC), Gary Gensler, has described cryptocurrency investments as “full of fraud, scams and abuse.” In the murky world of crypto-DeFi, it is difficult to know who provides money for loans, where the money flows or how easy it is to trigger the currency crisis.

There are no standards for risk management or capital reserves. There are no transparency requirements. Investors often do not know how to manage their money. Deposits are not insured. Let’s go back to the finances of the wild west of the 1920s.

Prior to the collapse of cryptocurrencies, the value of cryptocurrencies had continued to rise, attracting a growing number of investors and a large amount of Wall Street money, along with celebrity endorsements. But then again, all Ponzi schemes are finally collapsing. And it looks like cryptography is falling apart now.

Why is this market unregulated? Mainly due to the intensive lobbying of the cryptographic industry, whose bosses want the Ponzi scheme to continue.

The industry is investing a lot of money in political campaigns.

And he has hired many former government officials and regulators to put pressure on his behalf, including three former chairmen of the Securities and Exchange Commission, three former chairmen of the Commodity Futures Trading Commission, three former U.S. senators, a former chief of the White House cabinet. , and the former chairman of the Federal Deposit Insurance Corporation.

Former Treasury Secretary Lawrence Summers advises cryptocurrency investment firm Digital Currency Group Inc and serves on the board of Block Inc, a financial technology company that invests in cryptocurrency payment systems.

If there is one thing we should have learned from the crashes of 1929 and 2008, it is that the regulation of financial markets is essential. Otherwise, they become Ponzi schemes that ultimately leave nothing to small investors and destabilize the entire economy.

It’s time for the Biden administration and Congress to regulate cryptography.

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