There is a good reason why every civilized country in the world
tightly regulates its financial system. The 2008 global financial
crisis, after all, was largely the result of rolling back financial
regulation. Crooks, criminals, and grifters are a fact of life, and no
financial system can serve its proper purpose unless investors are
protected from them.
Hence, there are regulations requiring
that securities be registered, that money-servicing activities be
licensed, that capital controls include “anti-money-laundering” (AML)
and “know your customer” (KYC) provisions (to prevent tax evasion and
other illicit financial flows), and that money managers serve their
clients’ interests. Because these laws and regulations protect investors
and society, the compliance costs associated with them are reasonable
But the current regulatory regime does not capture all
financial activity. Cryptocurrencies are routinely launched and traded
outside the domain of official financial oversight, where avoidance of
compliance costs is advertised as a source of efficiency. The result is
that crypto land has become an unregulated casino, where unchecked
criminality runs riot.
Related: Facebook’s New Libra Currency Runs Into Distrust in the Senate
This is not mere conjecture. Some of the biggest crypto players
may be openly involved in systematic illegality. Consider BitMEX, an
unregulated trillion-dollar exchange of crypto derivatives that is
domiciled in the Seychelles but active globally. Its CEO, Arthur Hayes,
boasted openly that the BitMEX business model involves peddling to
“degenerate gamblers” (meaning clueless retail investors) crypto
derivatives with 100-to-one leverage.
To be clear, with 100-to-one leverage, even a 1% change in the
price of the underlying assets could trigger a margin call and wipe out
all of one’s investment. Worse, BitMEX applies high fees whenever one
buys or sells its toxic instruments, and then it takes another bite of
the apple by siphoning customers’ savings into a “liquidation fund” that
is likely to be many times larger than what is necessary to avoid
counter-party risk. It is little wonder that, according to one
independent researcher’s estimates, liquidations at times account for up
to half of BitMEX’s revenue.
BitMEX insiders revealed to me that this exchange is also used
daily for money laundering on a massive scale by terrorists and other
criminals from Russia, Iran, and elsewhere; the exchange does nothing to
stop this, as it profits from these transactions.
As if that were not enough, BitMEX also has an internal
for-profit trading desk (supposedly for the purpose of market-making)
that has been accused of front running its own clients. Hayes has denied
this, but because BitMEX is totally unregulated, there are no
independent audits of its accounts, and thus no way of knowing what
happens behind the scenes.
Read: Bitcoin’s Latest Decline Revives Debate Over Government Regulation
At any rate, we do know that BitMEX skirts AML/KYC regulations.
Though it claims not to serve U.S. and U.K. investors who are subject
to such laws, its method of “verifying” their citizenship is to check
their IP address, which can easily be masked with a standard VPN
application. This lack of due diligence constitutes a brazen violation
of securities laws and regulations. Hayes even openly challenged anyone
to try to sue him in the unregulated Seychelles, knowing he operates in
the shadow of laws and regulations.
Earlier this month, I debated Hayes in Taipei and called out
his racket. But, unbeknownst to me, he had secured exclusive rights to
the video of the event from the conference organizers, and refused for a
week to release it in full. Instead, he published cherry-picked
“highlights” to create the impression that he performed well. I suppose
this is par for the course among crypto scammers, but it is ironic that
someone who claims to represent the “resistance” against censorship has
become the father of all censors now that his con has been exposed.
Finally, shamed in public by his own supporters, he relented and
released the video.
On the same day we debated, the U.K.’s Financial Conduct
Authority proposed an outright ban on retail high-risk crypto
investments. Yet, barring a concerted response by policymakers, retail
investors who are lured into the crypto domain will continue to be
suckered. Price manipulation is rampant across all the crypto exchanges,
owing to pump-and-dump schemes, wash trading, spoofing, front running,
and other forms of manipulation. According to one study, up to 95% of
all transactions in Bitcoin are fake, indicating that fraud is not the
exception but the rule.
Read: Facebook’s Libra Could Be Rocket Fuel in Emerging Markets
Of course, it is no surprise that an unregulated market would
become the playground of con artists, criminals, and snake-oil salesmen.
Crypto trading has created a multi-billion-dollar industry, comprising
not just the exchanges, but also propagandists posing as journalists,
opportunists talking up their own financial books to peddle “shitcoin,”
and lobbyists seeking regulatory exemptions. Behind it all is an
emerging criminal racket that would put the Cosa Nostra to shame.
It is high time that U.S. and other law-enforcement agencies
stepped in. So far, regulators have been asleep at the wheel as the
crypto cancer has metastasized. According to one study, 80% of “initial
coin offerings” in 2017 were scams. At a minimum, Hayes and all the
others overseeing similar rackets from offshore safe havens should be
investigated, before millions more retail investors get scammed into
financial ruin. Even U.S. Secretary of the Treasury Steven Mnuchin—no
fan of financial regulation—agrees that cryptocurrencies must not be
allowed to “become the equivalent of secret numbered accounts,” which
have long been the preserve of terrorists, gangsters, and other
Nouriel Roubini, a professor at NYU’s Stern School of
Business and CEO of Roubini Macro Associates, was senior economist for
International Affairs in the White House’s Council of Economic Advisers
during the Clinton Administration. He has worked for the International
Monetary Fund, the US Federal Reserve, and the World Bank.