As cryptocurrency goes wild, fear grows about who might get hurt
Cryptocurrency’s extraordinary run has attracted hordes of new investors, drawn by the potential for huge profits and a culture soaked in humor and risk-taking.
By Hamza Shaban 5/17/2021
For a brief moment, Brian Cardarella was a Dogecoin millionaire.
The 41-year-old said he invested tens of thousands of dollars earlier this year in the cryptocurrency. As the digital token — created in 2013 based off a humorous online meme — surged, he watched the value of his investment cross $1 million.
Despite a recent reversal, it is still worth hundreds of thousands of dollars, according to a screenshot he provided of his trading account. “It is an emotional roller coaster,” said Cardarella, who lives near Boston and founded a software consulting firm.
The rise of bitcoin — a type of cryptocurrency that exists on computers all over the Internet and does not rely on any government to oversee it — has often dismissed as a financial fad for techie speculators.
But this year has seen the number of cryptocurrency explode, minting hordes of newly successful investors drawn by the potential of huge profits, a culture soaked in humor and the encouragement of celebrity billionaires including Elon Musk. Dogecoin, named after the Shiba Inu “doge” meme, is up over 9,000 percent this year, according to Coindesk, a media outlet that tracks cryptocurrency.
But the wild turns of the crypto market are colliding with intensifying concern from regulators about the risks taken on by ordinary investors and the potential for these largely anonymous digital payment systems to facilitate misconduct.
Last week, the U.S. Securities and Exchange Commission warned investors that bitcoin is a “highly speculative investment,” pointing to “the lack of regulation and potential for fraud or manipulation.”
The ransomware attack that brought down the Colonial Pipeline, sparking gas shortages in large swaths of the country last week, renewed attention on the use of cryptocurrencies to facilitate crime.
“There is a tension of privacy versus a government’s right to know,” said Kenneth Rogoff, an economics professor at Harvard University, who noted tax evasion and the financing of illicit activity among the challenges that cryptocurrencies pose to governments.
“This has been going on with cash forever, but cash is nothing compared to the potential for crypto,” he said.
In the wake of the GameStop frenzy earlier this year, when stocks became memes, hype replaced fundamentals and celebrity endorsements turned attention into financial authority, regulators are taking notice.
Statements from finance officials highlight growing government concern, especially as figures such as Musk have shown their outsize influence over markets and, experts say, as prices swing wildly when influencers proclaim their excitement or scorn.
The SEC’s recent warnings of the dangers of bitcoin follow calls for more muscular government action, establishing a federal watchdog with a clear mandate to oversee cryptocurrency’s regulatory gray area.
“Right now the exchanges trading in these crypto assets do not have a regulatory framework, either at the SEC or our sister agency, the Commodity Futures Trading Commission,” SEC Chair Gary Gensler told Congress earlier this month in one of his first remarks on cryptocurrency regulation. “Right now there’s not a market regulator around these crypto exchanges. And thus there’s really not protection against fraud or manipulation.”
Officials abroad have taken a less diplomatic approach.
“I’m going to say this very bluntly again,” said Andrew Bailey, governor of the Bank of England. “Buy them only if you’re prepared to lose all your money.”
Regulators face increasing pressure to set new policy on cryptocurrency not just because of the risks to retail investors, but the broader crypto boom bolstered by premier financial institutions such as JPMorgan Chase and Goldman Sachs advancing plans to offer crypto-based financial products to their clients.
“The more that these tendrils from crypto are weaving their way into the mainstream financial system, the more they can pose a systemic risk,” said Walch of St. Mary’s University. “They cease being their own alternative-world projects — it’s not just those dedicated people anymore.”
And as the Colonial Pipeline ransomware crisis made clear, government officials have yet to resolve a fundamental tension at the heart of bitcoin and other cryptocurrencies.
“There are two very different concepts: creating anonymity in the blockchain and simultaneously having a traceable and regulated currency — in my mind, they are very antithetical concepts,” said Alex Reffett, co-founder of the East Paces Group, a wealth management firm.
“The government can destroy cryptocurrencies if they want to,” he said. “But the ideas that make cryptocurrencies unique and valuable to at least some degree relies on the unregulated areas.”
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