The cryptocurrency crash has people talking about regulating and centralizing the notoriously anti-regulation, decentralized industry. But would regulations change cryptocurrency so much that it would essentially stop being crypto?
Cryptocurrency started the year strong. But as 2022 ends, what was supposed to be a revolutionary way to buy, save and invest has collapsed. The price of nearly every cryptocurrency has plunged. Multiple businesses built specifically around them have cratered.
Now, members of Congress are calling for more stringent regulations around crypto. But would regulations change cryptocurrency so much that it would essentially stop being crypto? Today, the over-talked-about, often under-understood world of crypto. Read the full transcript here.
Host: Gustavo Arellano
Guests: L.A. Times reporter Michael Hiltzik
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Gustavo Arellano: Cryptocurrency started 2022 strong. Bitcoin, the most popular type of it, was around its all time high of $68,000 per coin. But as 2022 ends, what was supposed to be a revolutionary way to buy, save and invest has collapsed.
News clip: Cryptocurrencies have also cratered. Bitcoin, which was at almost $69,000 in November, slumped to below $20,000 this month.
Gustavo Arellano: The price of nearly every cryptocurrency has plunged. Multiple businesses built specifically around them have cratered, with the exchange FTX being the biggest bankruptcy of them all.
John Ray: The FTX group's collapse appears to stem from absolute concentration of control in the hands of a small group of grossly inexperienced, unsophisticated individuals.
Gustavo Arellano: Now, members of Congress are calling for more stringent regulations around crypto.
News clip of Sen. Elizabeth Warren (D-Mass.): Crypto billionaires argue crypto is special, but a basic principle of our financial system is same kind of transactions, same kind of risk, means same rules apply.
Gustavo Arellano: But would regulations change cryptocurrency so much that it would essentially stop being crypto?
Gustavo Arellano: I’m Gustavo Arellano. You’re listening to The Times, essential news from the L.A. Times.
It’s Wednesday, Dec. 21, 2022. Today: Can regulation save defiantly anti-regulation cryptocurrency?
Gustavo Arellano: Joining me today to break down the overtalked, often under-understood world of crypto is my L.A. Times colleague business columnist Michael Hiltzik. Michael, welcome to The Times.
Michael Hiltzik: Thanks, Gustavo. It's great to be here with you.
Gustavo Arellano: I think most people know by now what cryptocurrency is, but maybe not what a crypto exchange is, and definitely not why there's so much attention being paid to this guy, Sam Bankman-Fried. Who is he? What did he run, and why is all of this drawing so much attention from the feds?
Michael Hiltzik: Yeah, well, Sam Bankman-Fried presented himself and was accepted by many people who should have known better as the most credible, the most honest, the most serious operator of a crypto exchange that we had. He was sort of the good guy. At least that was the image that he projected. We've come to see – and I think people who understood this field better than politicians, Major League Baseball executives and owners of stadiums in Miami, knew better – that he was really just another conman in a field that really does lend itself basically to fraud.
Gustavo Arellano: And Bankman-Fried was just some 20-something-year-old, right?
Michael Hiltzik: He's 30 now. When he started, he was in his late 20s. He talked a good game, although a lot of it was word salad and it was jargon, and he snowed a lot of people and continued to snow people until really the last few days or the last week when he got indicted and charged with fraud by the SEC and other regulators at the federal government. You know he talked a good game.You know he testified before Congress, and the representatives sat there and listened to him as though he had something to say, while experienced exchange operators in the commodities business were sitting back and saying, “This is just baloney.”
Gustavo Arellano: So what did he say was wrong with crypto exchanges, and what did he say he was doing to fix those problems?
Michael Hiltzik: Well, what he claimed was that he had a more rigorous way of accounting for customers’ assets and funds and making sure that the exchange and the customers counterparties didn’t lose money or get defrauded. He claimed to have all sorts of rigorous computer algorithms that would make sure that an investor, or a trader using his exchange, which was FTX, basically would be kept within limits. He claimed he had all of this very sophisticated technology. Well, it turned out that he had none of it. And in fact, the fixer, this is a guy who unwound Enron, said compared to Enron, this is absolutely the most disorganized operation I've ever seen in my entire experience, there was just nothing going on. It was run by a bunch of kids who didn't know what they were doing and maybe didn't wanna know what they were doing.
Gustavo Arellano: And how many assets were we talking about in terms of dollar amounts?
Michael Hiltzik: Well, we're talking about billions of dollars that the new CEO has to trace. And he said we're not sure we're gonna be able to find any or much of this money because it's all been paid out to Bankman-Fried and his cronies and they've spent it and we don't know where it went. He said we're trying to do so, but the accounts are just chaos.
Gustavo Arellano: So a lot of promises, a lot of money. Now FTX is gone and SBF was arrested. What happened?
Michael Hiltzik: There was an expose by a crypto newsletter, which said we've looked at the assets at FTX and most of the assets are in these crypto tokens that FTX produced and decided what the value was. You know, FTX says, well, our FTT token is worth such and such. And when people saw that, they realized that there's no underlying value in this outfit's balance sheet. So a run on the bank started, basically, and investors and traders tried to get their money out and they discovered that the money was just not there to pay them. And that was basically the beginning of the end.
Gustavo Arellano: It sounds all of this, like your traditional pyramid scheme.
Michael Hiltzik: You can call it a pyramid scheme. You can call it a Ponzi scheme. These are all varieties of confidence games. But the basic problem is that there's no underlying value. You are basically buying something on the hope that there's a greater fool out there who will buy it from you. But you can't say that any of these cryptocurrencies has a use.
Gustavo Arellano: It's really remarkable. I mean, you've been saying this for a decade, but if we were having this conversation at the start of this year, we'd be having a totally different conversation, and specifically about the mainstreaming of crypto. Companies were buying the naming rights to sports arenas. The Super Bowl was packed with crypto commercials and funny commercials, by the way, with Larry David, Matt Damon, other celebrities.
Clip of ad with actor Matt Damon: With four simple words that have been whispered by the intrepid since the time of the Romans. Fortune favors the brave.
Gustavo Arellano: And FTX isn't the only company, though, that has had that rough year. So when and how did cracks start appearing for crypto?
Michael Hiltzik: Going back to late last year and through this year, you just had a series of collapses of crypto trading companies, crypto brokerages that looked at one point or another as though they were the real thing, and it turned out that they were not, The funny thing is Celsius' CEO. I was on a panel with him a year ago in September, and he was claiming that Celsius was so much better than the conventional banks because people got defrauded by putting money in banks.
Clip of Celsius CEO Alex Mashinsky: Banks have abused their powers. All banks in the United States reported all-time record profits … OK? At the same time, they're paying their depositors the lowest interest they've ever paid in their history.
Michael Hiltzik: [He was claiming that] nobody's been defrauded with Celsius.
Clip of Alex Mashinsky: Celsius is my company, pays 8.8% yield on stablecoins, on USDC for the last four years, 8.8%. How much are you getting paid by your bank? So tell me who's telling the truth and who's lying to you?
Michael Hiltzik: And of course, five or six months later, Celcius was bankrupt. So you had Celsius, you had a number of other firms that failed, many of them because they were trading with the first firms that failed. So there was this cascade of failures that went on through the year and finally culminated in the disaster at FTX.
Michael Hiltzik: Those of us who've been covering the investment markets for as long as I have know that it's just at that point when everything looks like it's going on the up and up and higher and higher that you have to look at that as a red flag. When Staples Center changed its name to Crypto.com center because Crypto.com paid a ton of money to get the stadium named after it. FTX's name is on the arena where the Miami Heat play. In Miami, if you watch a Major League ballgame this year, you saw that all the umpires were wearing these badges that said FTX. You look at that and you say, these guys are trying to buy legitimacy and buy credibility, but they're not showing that they are legitimate and they are credible, and that is a dangerous signal for anybody who follows the investment markets. When basically everybody piles in, these late arrivals are the people who get taken to the woodshed. And that's what's happened.
Gustavo Arellano: And those people who are late arrivals, as you called them – if I go to a bank, there's always some sign that says the federal government insures my money. I think up to $100,000. Just in case the bank does close, my money is still guaranteed. Do these people in crypto who have lost things to FTX or other cryptocurrency exchanges, do they have any financial recourse at all?
Michael Hiltzik: No, they don't.
Michael Hiltzik: If a bank goes under, the FDIC will cover you up to a quarter of a million dollars of deposits. A crypto exchange goes under, you have no recourse. And that's why John Ray, the receiver of FTX, has been saying, we're not sure that anybody is gonna see a dime of what they put in with these people.
Gustavo Arellano: Coming up after the break, how the big crypto companies strayed from the original vision of cryptocurrency.
Gustavo Arellano: So, Michael, you really made out crypto to be something that’s in a very dire state, and you say you’re just stating the facts that you've seen as someone who's reported on this for over decades. So why, though, then did cryptocurrency like bitcoin and companies like FTX get so popular in the first place, or at least make billions of dollars or be worth billions of dollars? I guess what I'm trying to get at is, if cryptocurrency is such a supposed grift, what was or is the allure of crypto to people?
Michael Hiltzik: It started with bitcoin. Bitcoin originated in an algorithmic, computer science paper, which said, you know, there's a way that we can trade value that doesn't require an intermediary like a bank or a brokerage or a central bank, and we can create this currency that's entirely independent of government. And this appealed to the libertarian streak in a lot of people who said, well, you know, government is just in the way and government is evil. And central banks manipulate their currency for the benefit of the elite and insiders. And we are going to free the currency markets from that by creating our own currency, creating value for it, and allowing it to be traded in and out of national boundaries. So that was the basic idea. And you still hear crypto enthusiasts saying, we are much better than what they call fiat currency and fiat because a government by fiat tells you what the value is of a dollar or a yen or a euro. So it appealed to sort of the, you know, the Idaho-types who, you know, who think, you know, they can protect themselves from the machinations of, of evil governments.
Gustavo Arellano: OK, so the proponents of cryptocurrency pitched it as this libertarian dream, but what are the drawbacks of cryptocurrency?
Michael Hiltzik: There were a lot of drawbacks. The main drawback is that there's no natural floor to the value of any given cryptocurrency. Gold, you can say, well, it's valuable because you can use it in industrial processes and everybody recognizes that it's got value and thus you can discover a price for it in a legitimate market. The dollar has value because it's backed by the full faith and credit of the United States government, which has never defaulted on its obligations. So you can trust that a dollar will have some value. It may fluctuate against other currencies, but it will have some value that's recognized. You can buy eggs and milk and cars with it. Crypto, the trading of it and the using of it can be so complicated that it's easier to just buy something with dollars. In fact, a lot of people who've had crypto wallets, that is, they've, you know, had accounts with crypto in it. Basically, if they want to use it in the real world, all they can do is convert their crypto to dollars and then use the dollars. One drawback certainly is that your account is validated by a code that you have to remember or keep a record of. And yet if you lose that code, you lose access to your crypto forever. They've said, well, it's great that if you do a transaction with crypto, it's irreversible. Nobody can step in and make you turn it around. But in fact, if you're a consumer, or you know, any normal person, you don't wanna be in a transaction that you can’t unwind if you've been cheated or defrauded. You wanna be able to go to somebody and have recourse and say, I want my money back because I didn't get what I paid for. With crypto, you can't do that. Once you've made the deal, you can't get your money back. There was a long period in which there was a notion that crypto was really good to commit crimes with because the idea was a crypto transaction couldn't be traced by government, by the FBI. Well, that turned out to be not so true. So now it's not even good to commit crimes with. So what is it good for? Nobody really can say. So all of these benefits, really, if you drill down, begin to look much, much more like drawbacks. And that's really one of the fundamental problems with crypto.
Gustavo Arellano: So if there were so many risks attached to cryptocurrency, Michael, what did its proponents say to try to convince the public, “Hey, trust crypto is safe, trust us! Come join the cryptocurrency movement”?
Michael Hiltzik: Well, the Plan B of crypto enthusiasts was this notion that there's an underlying technology that's of value in the real world, known as blockchain. And the blockchain is basically a ledger just like a normal ledger, except that it's out there in the cloud and it can't be altered by anybody without permission. And the idea was that with a blockchain-based ledger, you always know what you are. Nobody can fake it, nobody can defraud you, and so on and so forth. But if you really drill down, you discover that you can do nothing with blockchain that you can't do with perfectly legitimate, traditional, conventional ledger-keeping systems. So Plan B doesn't work either.
Gustavo Arellano: But weren't there stories of people getting rich off of crypto? Like buying bitcoin early on or some of these other currencies, and then selling at the right time, then getting rich off of it?
Michael Hiltzik: Some people did get rich off it. If you got in early and you knew when to get out, you could escape with your skin.
Clip: I started with crypto. That is my bread and butter. I entered right in there, right there, at $10,000. And we saw where price went after that.
Michael Hiltzik: The problem is that was a fairly small cadre of investors and buyers. By the time that crypto is being advertised at the Super Bowl …
Clip: Like I was saying, it's FTX, it's a safe and easy way to get into crypto. Eh? I don't think so, and I'm never wrong about this stuff.
Michael Hiltzik: … people were getting in at a very high price, and they've all lost money because last February and really last November of 2021 was the peak for bitcoin. It's only come down since then. And people who got in that period just have been destroyed.
Clip: So I lost 1.5 million on FTX. I've filed for bankruptcy, that money is gone and I will never see it again.
Michael Hiltzik: They've lost tremendous amounts of money. They thought they were getting in on the ground floor, and in fact they were getting in at the penthouse and the only way to go is down. And that's really what's happened, I think, to most of these investors.
Gustavo Arellano: So you have the investors, but then you have these companies, uh, like FTX. So they're not behind the cryptocurrency, the way I understand it. They're just buying and selling crypto for their customers and then holding them in accounts. Can you explain that difference between the companies and then the currency itself?
Michael Hiltzik: Sure. Well, FTX did both. FTX claimed that it would be basically a depository. You would send your crypto to FTX, they would hold it for you, and then when you wanted it back, you would say, I wanna withdraw some of these assets and they would send it to you, but you could also buy and sell and trade with crypto on margin. In other words, you could borrow on the money that you had deposited with FTX or Celsius or any of these other trading brokerages and you could use it to invest in other crypto or do all sorts of trades with. And that's where people got in a lot of trouble because these brokerages, which claimed that they were only doing what you wanted them to do with your assets were actually trading for themselves. FTX had this deal where they said, you know we are protecting you. We're making sure that you're fully margined and if you need to put up more collateral, we have the right to sell you out so that your counterparties or trading partners don't lose money because you've been in trouble. Well, it turned out that FTX also had this hedge fund, this trading arm called Alameda. Alameda was exempt from all of these rules that FTX said it was applying to all its other customers. So it got into a huge amount of trouble, and to bail it out, FTX just gave it money that its customers had deposited with it. And of course, that's the ultimate no-no. You can't commingle your customers’ funds with your own funds. You have to show who's got what, who owns what, and FTX did nothing of that, and that's why the money has disappeared.
Gustavo Arellano: It sounds like these crypto exchanges, you know, they pass themselves off as, “Oh, we're not with the government, so therefore we're not banks. We're decentralized currency.” But they're operating like banks and they're operating like centralized currency. So are there any banking or monetary regulations that they've had to abide by up to this?
Michael Hiltzik: Yeah, the regulators, the SEC, the Commodity Futures Trading Commission, the Treasury, the Fed, they all take the position that they have enough laws and regulations to apply to crypto. They don't need anything more. They need resources. They need the funds to hire people to regulate. But that you can interpret all of this activity as activity that falls within the regulations we already have, and I think that's probably true.
Michael Hiltzik: Now, what Bankman-Fried was trying to sell people on was that crypto would benefit from a new regulatory regime, and that was exclusively designed for crypto. And now the traditional banks, the traditional brokerages would hear that and say, he's really blowing smoke. What he really wants is less regulation and preferably no regulation. And the reason he was making this pitch, I think is obvious today because he was really skating close to the wind.
Gustavo Arellano: More after the break.
Gustavo Arellano: So, Michael, the SEC and other regulators are saying they have enough in their toolbox to rein in crypto. But has the collapse of FTX, Celsius and other companies in the crypto world prompted any new calls for broader regulations?
Michael Hiltzik: Yeah, the regulators, the legitimate regulators, the SEC, the FTC, treasury, the Fed, they've been calling on Congress to allow them, or at least to encourage them, to get involved in crypto regulation. The Treasury Secretary Janet Yellen has been saying for a long time that she thinks crypto, if it gets out of control, might damage the overall financial system, but it hasn't yet. So the legitimate regulators have been calling for years really on Congress getting its leash on crypto, but they also say they're willing to step in now it's, there's been a dispute among the regulators about who really should be the lead regulator of this field. But, nobody really thinks it needs new laws of any great moment to regulate. The SEC has said, look, these crypto offerings are securities. We regulate securities. We'll put people in jail if we think they're issuing a crypto security fraudulently. I think they're happy with what they've got. They just want more authority over the other regulators to be in charge.
Gustavo Arellano: What does it mean philosophically if cryptocurrencies are suddenly labeled as securities?
Michael Hiltzik: Well, if they're labeled as securities, then the regulatory requirements for trading them, for holding them, for offering them, and the market just become much, much more complicated and rigorous. And I think if crypto were regulated as a security, I don't think FTX and Sam Bankman-Fried would've been able to go anywhere nearly as far as he did go in terms of taking people's money. He would've been caught and stopped much, much earlier in the process.
Gustavo Arellano: But basically if they're securities, then they're no longer currency, so there's no point in calling them currencies and no one should treat them as currencies.
Michael Hiltzik: They aren't currencies. They simply do not match the definition that we've had for centuries as to what a currency is. They're too volatile. The price goes up and down. You can't use them to pay your taxes to a government. They just are not; they're called cryptocurrencies. Some of them are called crypto tokens because they don't really trade as assets. They just are not currencies. They're not stores of value. They're not anything. Except collectibles; they're like Beanie Babies, which, you can have a craze for things like Beanie Babies and sooner or later the real value comes to the fore and you discover that they're just not worth what you thought they were.
Gustavo Arellano: You're going old-school ’90s with the Beanie Babies, when you should have said the NFTs, those digital tokens.
Michael Hiltzik: Sure, NFTs – really, they're just a variation on this scam. There's no fundamental value to these things. And people who bought NFTs during the frenzy of maybe a year ago have woken up and discovered that what they spent thousands or hundreds of thousands or even millions of dollars to buy are worth pennies now. And that's the same thing that happens. You know, P.T. Barnum said it best: There's a sucker born every minute. And there's always going to be something out there that attracts people who think if they get in on the ground floor, they're gonna make a mint.
Gustavo Arellano: Finally, Michael, Sam Bankman-Fried is charged with all sorts of things. Crypto is pretty low right now. What's its future?
Michael Hiltzik: It might have a future because people will buy into anything if you dress it up properly. I think what this whole affair has brought home is that there's no fundamental value there.
Michael Hiltzik: The truth is that crypto makes no sense. It never made sense. There's no real value there. There are no assets there. It's essentially a con game. And it inevitably was going to blow up because the moment there was the first hint of trouble, you discover that there's no underlying value. So everything basically goes to where it belongs, which is at zero.
Michael Hiltzik: I've been writing about this for 10 years or so, and every time I've talked to one of these guys, I've said, what's your use proposal? What's your use idea? What is this stuff good for? And to this day, I have never gotten an answer that makes any sense.
Michael Hiltzik: It's really just a platform for fraud. And I think a lot of people who were interested in crypto before this basically have woken up and seen that it's really not a smart investment for anybody, but there will always be people who will buy into something new. I think crypto may reemerge dressed up in some new way. It will attract followers, but it's all going to come apart sooner or later, as this did.
Gustavo Arellano: Michael, thank you so much for this conversation.
Michael Hiltzik: Thanks for having me.
Gustavo Arellano: And that's it for this episode of The Times Essential News from the L.A. Times.
Nicola Perez and David Toledo were the Jefas on this episode, it was edited by Heba Elorbany and Mario Diaz mixed and mastered it. Our show is produced by Shannon Lin, Denise Guerra, Kasia Broussalian and David Toledo. And Ashley Brown.
Our editorial assistants are Roberto Reyes and Nicolas Perez. Our engineers are Mario Diaz, Mark Nieto. Mike Heflin. Our editor is Kinsee Morlan. Our executive producers are Jazmín Aguilera, Shani Hilton and Heba Elorbany. And our theme music is by Andrew Eapen.
This is Nicolas Perez's first episode that he made happen. So congrats, man. Onto the next one.
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I'm Gustavo Arellano. We'll be back Friday with all the news in this Madre. Gracias.