Editorial: Why embattled crypto needs traditional rules, not a new name

These are tough times for the financial markets, with a string of bank failures delivering a nasty shock during a time of high inflation.

One unlikely winner from the market turmoil: cryptocurrencies. The price of these digital assets has soared in recent weeks, as traders spooked by an apparent upset in the bank-dominated financial system bid up an alternative known for its outsider status.

Here’s the rich irony for those who remember the early days of crypto: Even as crypto prices were rising, cryptocurrency companies in the U.S. were angling to become finance-industry insiders, embracing traditional business models that not long ago they were intent on disrupting.

For a sign of the times, consider the standard attire at the Futures Industry Association’s annual conference earlier this month at a swanky resort in Florida.

Last year, youthful attendees in black T-shirts, shorts and hoodies signaled that outsiders were indeed storming the gates in Boca Raton. This year, crypto operators dusted off their blazers and slacks, and talked up the benefits of registering and being regulated like other trading firms.

“The crypto people are coming to the traditional model,” observed Walt Lukken, who leads the trading association. “There’s a reason the traditional model exists.”

Crypto has a long way to go before anyone would call it traditional, but the change in attitudes is welcome news for Chicago and other global trading centers. As this page has noted, stronger rules and greater participation from mainstream financial firms can help this promising marketplace achieve its potential — minus the shady conduct that has given it such a bad name that some crypto operators want to drop “crypto” in favor of “blockchain” or another less-tainted name for their industry.

Cryptocurrencies are digital files that can be used as money. They rely on blockchain, a digital ledger that permanently records transactions. That nifty technology enables participants to trade with each other, person-to-person, without a central counterparty to guarantee trades, as in Chicago’s financial markets.

Rebranding this industry will be tough as the bad news just keeps coming. For starters, the banking crisis that struck in recent weeks took down lenders with big exposure to crypto, notably Signature Bank and Silvergate Bank, until recently among the industry’s most aggressive financiers.

Looming even larger is Sam Bankman-Fried, the one-time face of the business whose FTX exchange imploded in November, capping a disastrous 2022 for the crypto biz. The criminal case against “SBF,” as he’s widely known, looks worse with each passing day as additional details give ammo to those who dismiss not just SBF and FTX but the entire industry as one big, unregulated scam. SBF has pleaded not guilty and said he is innocent of any criminal wrongdoing.

Federal prosecutors last month brought additional charges against SBF, who faces decades in prison if convicted, based on the huge scale of FTX’s losses. He and a handful of alleged accomplices stand accused of stealing billions in customer funds.

In recent days, creditors learned that the dozens of companies making up FTX had an astonishing $6.8 billion shortfall when they filed for bankruptcy last year, with $4.8 billion in assets against $11.6 billion owed to customers, vendors and others unlikely to ever be made whole.

FTX further revealed that SBF received $2.2 billion in payments and loans before the company failed, while several other top executives cashed out hundreds of millions. One of his most prominent lieutenants, Caroline Ellison, who headed the entangled Alameda Research crypto hedge fund that is said to have been a conduit for siphoning off customer funds, received $6 million.

That $6 million is a large sum, of course, but many women working in finance will note that even at an upstart claiming to be progressive, the highest-ranking female exec received far less than the guys who were supposedly her peers. Ellison has signed a plea deal and is expected to testify for the prosecution in the criminal trial currently scheduled for October.

Given that catastrophic backdrop, how could the price of crypto be on the rise? Plenty of market veterans believe those who continue to trade in venues where customer accounts can go “poof” (no FDIC to come riding to the rescue) deserve whatever losses may come. Further, while prices have shot up, crypto markets are not as deep and liquid as they were a year ago, indicating participants have scaled down their activity.

Still, crypto is not dead, and, in our view, that’s a plus. While some would celebrate if this financial infant were smothered in its crib, we see potential. The technology underlying the industry could remake international payment systems, for instance, bringing greater efficiencies to the forefront.

We’re rooting for crypto to embrace basic rules that are second nature to other financial operators — namely, don’t play with customer money — and continue the effort to earn a place in the financial mainstream.

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