Believe it or not, it's the crypto cowboys who are calling for more industry regulation these days.
Crypto, often characterized as the "Wild West" of investments, has seen some of its most prominent supporters — including Shark Tank's Kevin O'Leary and Paolo Ardoino, Tether's CTO — calling for increased rules and regulations around cryptocurrencies.
But Lee Reiners, the executive director of the Global Financial Markets Center at Duke Law School, doesn't believe crypto enthusiasts are calling for increased regulation out of altruism. He said that when crypto believers call for clarity, what they really want is friendly legislation.
In an exclusive interview with Insider, Reiners discussed the current crypto crash, why he doesn't think there's any real use case for blockchain, and the kind of regulation he'd like to see the nascent industry adopt.
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Crypto has no real value
Reiners is familiar with regulatory oversight. He spent half a decade at the New York Federal Reserve, where he worked as a bank examiner, before leaving for his current position at Duke University in 2016.
Reiners' courses at Duke focus on fintech and policy, while his research studies how innovative financial technologies fit in with existing regulation. As crypto has exploded in popularity over the past few years, Reiners' courses have become increasingly popular as well — in fact over 30,000 people have taken his Coursera course, "FinTech Law and Policy."
Reiners believes the present crypto bear market is justified and says that the timing of crypto's crash disproves the idea that crypto is an inflation hedge — a thesis long held by investors such as Mike Novogratz and Bill Miller. He also thinks that crypto's boom over the past two years was a product of loose Federal Reserve monetary policy during the pandemic, rather than any inherent trait that gave cryptocurrencies a leg up over other investment vehicles.
"There's no cash flow. There's no fundamentals. Crypto trades entirely on sentiment, and while interest rates were near zero it functioned as just any other risk asset," Reiners said. "The moment the Fed started raising interest rates and inflation reared its ugly head, the crypto market started selling off, shattering the whole digital-gold investment thesis."
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Reiners said cryptocurrencies' meteoric price gains — which are arguably what attracted many investors to the nascent sector in the first place — are now working against them.
"You go back to the Satoshi white paper. It's all about peer-to-peer decentralized payments," Reiners said. "Well, if something is accelerating in price to $60,000, it's not a very good payment mechanism. Ethereum was designed specifically for smart contracts and decentralized applications. Well, when ethereum is $14,000, the gas fees are so high that it doesn't function well as a smart contracting platform."
Bitcoin's volatility, price, and regulatory uncertainty have indeed proved to be a stumbling block for the crypto's widespread adoption, while ethereum's gas fees grew shockingly high as the price of ether appreciated.
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It's worth noting that many in the crypto industry have created solutions to the issues Reiners raised. For example, bitcoin's lightning network allows for users to send fractions of a bitcoin at a low cost, and it's powering El Salvador's use of bitcoin. Cryptocurrencies such as avalanche and solana provide digital smart contracts with less costly fees than ethereum.
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But Reiners pushes back on the idea that blockchain — the underlying technology of cryptocurrencies — provides any real value at all.
"When it comes to blockchain, it's really not better at anything to be honest with you," Reiners said. "This is — by technology standards — not new. Bitcoin's been around since 2009, and we're still waiting for the killer use case. So you have to ask yourself this: If it hasn't happened yet, when will it? I would posit that it's not going to happen."
Crypto regulation
Following the recent crashes of major crypto companies, including Terra Luna, many in the crypto community are calling for increased regulation.
Kevin O'Leary explained that if crypto gets regulated, sovereign wealth funds and pension plans could invest in it like any other asset. If that were to happen, O'Leary believes that over $1 trillion will enter the market practically overnight.
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But Reiners is suspicious of the true motives of these crypto believers.
"Crypto people say: 'Oh, we just want regulatory clarity.' Right. I say, fine, it's pretty clear in China, but it's probably not the clarity you're looking for. So when they say, 'We want regulatory clarity,' that's a euphemism for 'We want favorable and light-touch regulation,'" Reiners said.
He also shared his thoughts on Sen. Cynthia Lummis' cryptocurrency bill, which he characterized as industry friendly. Specifically, he said the bill pushes for the Commodity Futures Trading Commission to regulate the crypto market, rather than the Securities and Exchange Commission.
"The crypto industry wants the CFTC to have this authority because the CFTC has given them everything they've always asked for," Reiners said.
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Reiners continued: "The CFTC is historically underfunded and under-resourced, especially compared to the SEC. Most importantly, the CFTC does not have an investor protection mandate. The SEC does, and that's what's needed here."
Reiners has proposed a radical solution to crypto regulation that goes a step further than any crypto cowboy's suggestions thus far: Ban cryptocurrencies.
In a recent opinion piece in The Wall Street Journal, Reiners said that "ransomware attacks have exploded with the emergence of cryptocurrency."
"Ransomware can't succeed without cryptocurrency. The pseudonymity that crypto provides has made it the exclusive method of payment for hackers. It makes their job relatively safe and easy," Reiners wrote in the article.
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Reiners believes that any benefits provided by crypto are outweighed by the damage done by ransomware, particularly in the case of the Colonial Pipeline attack last summer, and that worse attacks may be yet to come. Given his belief that cryptocurrencies only encourage speculative behavior among investors rather than provide any inherent value on their own, the simplest solution to deterring future attacks would be to do away with crypto entirely.
But for those who don't think crypto should be abandoned just yet, Reiners has two examples of legislative clarity he'd like to see with cryptocurrencies.
"Carve out a new definition in the securities laws called digital assets and subject them to the standards, rules, and regulations that all securities issuers and broker dealers are subject to," Reiners told Insider.
"I would also make sure that stablecoin and crypto stays out of the banking system. I would not allow banks to engage in cryptocurrency activities. We don't want that spilling over and impacting our banks," he continued.
