Crypto comeback belies future risks
Crypto comeback belies future risks

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Even as Sam Bankman-Fried faces decades in prison at his sentencing hearing later this month, the cryptocurrency market he promoted is staging a historic comeback.

Since October, when a federal jury convicted Bankman-Fried of committing massive fraud, the price of bitcoin has more than doubled. The world’s leading cryptocurrency could even rise next month ahead of a planned market event called a “halving,” which will halve the supply of new bitcoins being produced.

Bitcoin prices have soared so high that Bankman-Fried’s old firm, FTX, which lost billions of dollars in client funds, may end up repaying clients and creditors in full based on the increased value of its investment holdings. That prospect is sure to be part of Bankman-Fried’s plea for leniency on March 28 when he faces a federal judge who could impose a sentence of as little as six years or less, as Bankman-Fried requested, or 40- 50 years the feds say he deserves.

More broadly, the Bitcoin boom highlights the rise of retail participation in the markets. A new generation is drawn into speculating in stocks, options and alternatives such as cryptos, which are digital files created as artificial currencies and traded on electronic platforms around the world. The surge in activity stems from a combination of temptingly rising prices, new smaller-scale products and technology that makes accessing markets as easy as a phone call.

We have been pushing for stricter rules and greater transparency in the crypto market, which we believe is full of potential as well as danger. Established exchanges and trading firms are just beginning to bring order to what was a free-for-all. If cryptocurrencies were a crybaby at this point last year, they’ve become a wayward toddler finally getting some adult supervision.

A welcome milestone occurred in January when cryptocurrencies became available as exchange-traded funds. ETFs are common investments these days and are subject to reasonable regulations. So while mainstream crypto is still a wild card, it’s a blessing to see responsible “big kids” like Chicago’s CME Group and Cboe Global Markets playing in the same sandbox.

At the recent Futures Industry Association conference in Boca Raton, Florida, established players pleaded for clearer rules governing fledgling markets like crypto. It’s no surprise to hear Rostin Benham, chairman of the Commodity Futures Trading Commission, say he needs more authority from Congress to expand his agency’s toolbox. However, appearing at the same event, free-market advocate Ken Griffin of hedge fund giant Citadel said he also saw room for improvement: “When you have regulatory clarity, you’re going to bring the big players into the space.”

Meanwhile, Securities and Exchange Commission Chairman Gary Gensler is pressing ahead without further authorization with dozens of enforcement actions that equate crypto and other digital assets with securities like stocks. Congress, disappointingly, continues to waver despite what appears to be bipartisan support for updating relevant laws. These updates are long overdue.

While Congress has failed to act, young investors continue to pull out their smartphones and jump into the fray. If the past is any guide, these upstarts stand to lose a lot in the end. When markets go up and up, the risks tend to multiply, and the same people who think they’re making easy money trading Nvidia options or Bitcoin ETFs could be in for a rude surprise if prices suddenly fall.

Behnam’s CFTC just released a report that deserves credit for pointing out a stark fact about inexperienced amateurs who dare to trade in venues dominated by professionals: “In general,” the report said, referring to regulated futures markets, “we’re finding that retail traders are losing money.” The CFTC report continues, noting how burnout could turn off a generation of amateur traders.

Officials at Cboe, where retail trading of its options contracts for more conventional investments is growing, say they are confident enough safeguards are in place to protect investors. The real test will come if – when? — the market rushes south.

The Bankman-Fried verdict will remind us how wrong things can get when regulations lag behind market realities. His FTX collapsed in a matter of days in late 2022. Investigators found billions of dollars of client funds missing, and a federal jury quickly convicted Bankman-Fried of seven felonies.

The recovery of the crypto market is good news for the victims of FTX, but no one should think that they were not victims just because the market recovered.

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