Cryptocurrency is like the economy of 'World of Warcraft' and legitimizing it with regulations would hurt the financial system, says economist

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After the FTX collapse, calls to regulate cryptocurrencies increased among US lawmakers. But doing so would confer legitimacy on the crypto industry, a prominent economist argued this week, and that, in turn, could lead to more widespread economic damage.

Stephen Cecchetti, economist and professor at Brandeis International Business School, highlighted economics within World of Warcraftan online video game with millions of players.

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

“I think of a lot of these things as being a video game, so if I look at analogue, the World of Warcraft it has 120 million players and it has an economy within it,” he continued. “Fortunately, no federal financial regulator has the responsibility to oversee the World of Warcraft🇧🇷 And while there’s money involved, I don’t think any of us would call them to oversee large online multiplayer games. like the World of Warcraftcrypto, in my opinion, does nothing to support the real economy, so legitimizing it will simply drain creative resources from productive activities.”

Cryptography Regulations

Creating regulations specifically for cryptocurrencies, he argued, would affect how banks approach the sector.

“Legitimating cryptocurrency will encourage banks to buy crypto assets directly and lend against them as collateral,” he said. “Imagine where we would be if leveraged financial intermediaries were holding crypto in November 2021 before the drop in value.”

Cryptocurrencies have dropped dramatically in value since the end of last year. Bitcoin, the largest cryptocurrency, has lost over 60% of its value this year.

If “virtually all transactions in the crypto world remain within the crypto world with no ties to the real economy,” Cecchetti said, then “it would be as if these things were happening on Mars and would leave the traditional financial system unaffected. That must be our goal.”

As for bad behavior in the industry – the “defining characteristic of the crypto world”, in his opinion – prosecutors can address it by “aggressively enforcing existing laws and, where appropriate, going after the celebrities who are promoting these things”, he said.

FTX founder Sam Bankman-Fried was charged with eight criminal counts, including two counts of wire fraud and six counts of conspiracy related to securities and commodity fraud, money laundering and violations of campaign finance laws.

‘Let the encryption burn’

Calls for greater regulation have gained traction in recent weeks following the epic FTX meltdown.

Last weekend, Senator Sherrod Brown, chairman of the Senate banking committee, called for more regulation and left open the possibility of banning cryptocurrencies, although he acknowledged that it would be “very difficult because it goes abroad and who knows how that will go.” work. 🇧🇷

In a statement after Bankman-Fried’s arrest in the Bahamas, Brown said: “Things that look and behave like securities, commodities or banking products need to be regulated and overseen by the responsible agencies that serve consumers… because it’s bright and shiny.

Cecchetti believes a good approach would be to “let the crypto burn,” as he and Kim Schoenholtz, a professor at NYU’s Stern School of Business, wrote in a recent Financial Times column.

“Following the collapse of FTX, authorities must resist the urge to create a parallel legal and regulatory framework for the crypto industry,” they wrote. “It’s much better to do nothing and just let the encryption burn.”

Actively intervening, they added, “would provide an official stamp of approval to a system that currently poses no threat to financial stability, and would lead to calls for public bailouts when crypto inevitably erupts again.”

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