The collapse of cryptocurrency giant FTX is a net positive for U.S. national security.
While we should applaud innovation and encourage responsible risk-taking, the rapid rise of barely regulated currencies in the midst of the U.S. monetary system has been dangerous. There is limited oversight to protect investors from fraud, theft, and other abuses while the growth of this ungoverned financial space has been a boon for money laundering. The FBI notes that stealing cryptocurrencies entails “relatively fewer complications” for criminals and rogue regimes than stealing from traditional banks. Over the past two years, North Korea may have absconded with at least $1 billion in cryptocurrency to support its nuclear and missile ambitions. FTX was dogged by allegations that it was hacked in the immediate wake of its bankruptcy in October.
Yet most concerning for long-term U.S. national security and economic stability is the danger an unregulated alternative form of currency poses to the power of the Federal Reserve and the U.S. dollar. Internationally, the dollar reigns supreme as the world’s reserve currency, with 60% of disclosed official foreign reserves held in dollars.
The soft power that accompanies the dollar’s dominance is formidable. People around the world rightfully equate this financial strength with the benefits of free markets and the rule of law. The tools of financial coercion, like sanctions, that successive administrations use to punish a variety of malicious activities also rely on the power of the U.S. dollar and the unique role it plays in global commerce.
If cryptocurrencies become a fully accepted and utilized alternative to the dollar, not only would America lose substantial influence abroad, but Washington’s ability to manage its domestic economy would also diminish. Warts and all, the U.S. Federal Reserve exists to “foster the stability, integrity, and efficiency of the nation’s monetary, financial, and payment systems so as to promote optimal macroeconomic performance.” It does this primarily by controlling interest rates to affect the money supply. The Fed’s ability to stabilize the U.S. economy and ensure American businesses maintain an advantage globally would erode should cryptocurrency adoption come to rival the dollar.
Despite these risks, cryptocurrency platforms like the one created by wild child Sam Bankman-Fried flourished. FTX was founded in 2019 and, over the next three years, grew to $32 billion at its peak valuation this year. That tremendous growth mirrored trends in the broader crypto market, which was worth close to $3 trillion by November 2021, measured as the total value of all cryptocurrencies in circulation. The number of cryptocurrency users nearly tripled globally during 2021. Pew Research found that 16% of American adults had invested, traded or used a cryptocurrency as of late last year. Over the past few years, global banks including Goldman Sachs, BNY Mellon, and Citigroup have begun investing heavily in cryptocurrencies, with Morgan Stanley investing nearly $1.1 billion into the crypto market between August 2021 and May 2022 alone.
At that $3 trillion high water mark, cryptocurrencies outstripped the value of U.S. cash in circulation by nearly 36%. If SBF and others hadn’t helped pop the bubble, crypto’s market value could have topped $5 trillion by 2030.
As the cryptocurrency market skyrocketed, regulators failed to keep up. The horse had left the barn, as FTX and its ilk gained outsized power in the halls of Congress. Members of both parties were keen to jump on that horse and ride it into the sunset.
In other words, the whole cryptocurrency endeavor had gotten too big to control. But obviously, not too big to fail. The collapse of FTX has erased $2 trillion in value with likely more to come as the cascading dominoes continue to fall.
What can be done now is to recognize the good news. The horse has come back into the barn. We can shut the door behind it. The answer is not to ban cryptocurrencies but to regulate them for the protection of U.S. national security and the public.
First, the U.S. government should adopt the stance of the Bank for International Settlements, which recommended the application of a “same risk, same regulation” approach to cryptocurrencies. Given that cryptocurrencies perform an equivalent economic function to other payment and settlement systems, they should be subject to equivalent risk, governance, and transparency standards.
It is also time to end the dithering about whether the Securities and Exchange Commission or Commodities Futures Trading Commission should be the regulator that puts a leash on crypto. This unending debate is precisely what allowed for abuses like those at FTX to flourish. As the magnitude of the risk from unregulated multi-trillion-dollar markets becomes ever clearer, the balance goes to anointing the SEC – a better established, better funded, and proven regulator.
Finally, it is time for the Federal Reserve to shift from studying an official U.S. digital currency toward implementing one. Digital currencies have advantages in terms of both rapidity and cost of transaction. The technology behind digital currencies is not inherently dangerous. Rather, the risk relates to who controls how they are used. In the Fed’s own words, a central bank digital currency “would be the safest digital asset available to the general public, with no associated credit or liquidity risk.”
There aren’t that many times in national security where the U.S. government gets a “do over” to correct a serious flaw.
Maybe SBF deserves our thanks.
Ms. Ravich is the chair of the Center on Cyber and Technology Innovation at the Foundation for Defense of Democracies. Sergio Rodriguera Jr. is Co-Founder at Straylight Systems and Senior Vice President at General Radar. FDD is a Washington, DC-based, nonpartisan research institute focusing on national security and foreign policy.