Economist says cryptocurrency is like ‘World of Warcraft’ economy and legalizing it through regulations would hurt the financial system

In the aftermath of the FTX collapse, calls for cryptocurrency regulation have increased among US lawmakers. A prominent economist argued this week that doing so would legitimize the cryptocurrency industry, which in turn could lead to more widespread economic harm.

Stephen Cicetti, an economist and professor at Brandeis International Business School, referred to the endogenous economy World of Warcraftan online video game with millions of players participating.

“I think the strongest argument against regulation is about conferring legitimacy,” he said in a cryptocurrency debate hosted by the Brookings Institution.

“I think a lot of this stuff is like a video game, and so if you look at an analog device, the World of Warcraft It has 120 million players and it has an economy inside of it.” “Fortunately, there is no federal financial regulator responsible for overseeing World of Warcraft. And while there is money, I don’t think any of us would ask them to oversee massive multiplayer online games. Like the World of WarcraftCrypto, in my opinion, does nothing to support the real economy, so legalizing it will simply drain creative resources from productive activities.”

Crypto Regulations

He said that creating regulations specifically for cryptocurrencies will affect how banks engage with the sector.

“The legalization of crypto will encourage banks to buy crypto assets directly and lend them as collateral,” he said. “Imagine where we would be if leveraged brokers were holding cryptocurrency in November 2021 before the value went down.”

The value of cryptocurrencies has dropped dramatically since late last year. Bitcoin, the largest cryptocurrency, has shed more than 60% of its value this year.

“If almost all transactions in the crypto world remain within the crypto world without ties to the real economy,” Cecchetti said, “it would be as if these things were taking place on Mars, and the traditional financial system would be left unaffected.” That should be our goal.”

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As for misconduct in the industry — “the hallmark of the crypto world,” in his view — prosecutors can address it by “vigorously enforcing existing laws and, where appropriate, prosecuting celebrities who promote these things,” he said.

FTX founder Sam Bankman-Fred has been charged with eight criminal charges, including two counts of wire fraud and six counts of conspiracy of securities and commodity fraud, money laundering, and violations of campaign finance laws.

“Let cryptocurrency burn”

Calls for more regulation have gained steam in recent weeks following the epic collapse of FTX.

Last weekend, Senator Sherrod Brown, chairman of the Senate Banking Committee, called for more regulation, leaving open the possibility of banning cryptocurrencies, though he admitted that it would be “very difficult because it would go abroad and who knows how that would work.”

In a statement released following Bankman-Fried’s arrest in the Bahamas, Brown said: “Things that look and act like securities, commodities or banking products need to be regulated and supervised by responsible agencies serving consumers…Cryptocurrencies don’t get a free pass because Bright and shiny.”

Cecchetti believes a good approach would be to “let the cryptocurrency burn,” he and Kim Schoenholtz, a professor at New York University’s Stern School of Business, wrote in a recent report. financial times pole.

“In the wake of the collapse of FTX, authorities must resist the urge to create a parallel legal and regulatory framework for the digital currency industry,” they wrote. “It is much better to do nothing and let the cryptocurrency burn.”

They added that active intervention would “provide an official seal of approval for a system that currently poses no threat to financial stability and will lead to calls for public bailouts when cryptocurrency inevitably erupts again.”

This story originally appeared on Fortune.com

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