The great crypto heist
It is no surprise that an unregulated market has become the playground of con artists, criminals, and snake-oil salesmen, writes Nouriel Roubini. Nouriel Roubini There is a good reason why every civilised country in the world tightly regulates its financial system. The 2008 global financial crisis, after all, was […]
Click here to view original article: The great crypto heist
It is no surprise that an unregulated market has become the playground of con artists, criminals, and snake-oil salesmen, writes Nouriel Roubini.
There is a good reason why every civilised 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 and appropriate.
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.
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 per cent 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.