Well, Finally: Belated calls for crypto regulation.

• Author: Ullmann, Owen

In 1998, Brooksley Born, the chair of the Commodity Futures Trading Commission, had grown increasingly alarmed by the explosive growth of unregulated over-the-counter trading of derivative contracts, which had a mouth-dropping estimated value of $80 trillion. These often-complex, computer-generated trades were a mystery to federal regulators--and most investors, who only understood the promised high rate of return at a presumed low risk.

Born was not as complacent. She already had seen several derivative deals go south in recent years, triggering hundreds of millions in losses, lawsuits, and claims of fraud. A major hedge fund, Long-Term Capital Management, blew up that year over bad bets, forcing a government orchestrated bailout. So Born's agency proposed regulating over-the-counter trades. Other top federal regulators at the time--Treasury Secretary Robert Rubin and his deputy, Lawrence Summers, Federal Reserve Chairman Alan Greenspan, and Securities and Exchange Commission Chairman Arthur Levitt--squashed the proposal. They yelled at her and said the CFTC had no jurisdiction over the lucrative market, which would only move overseas if restrictive government oversight was in the offing. Congress was opposed to the idea as well, aided by intense financial industry lobbying, and President Clinton signed a bill in 2000 that barred any regulation of OTC derivatives.

In December 2007, the very derivatives Born had wanted to regulate triggered a financial meltdown, a housing crisis, the collapse of Lehman Brothers less than a year later, a financial panic, and the Great Recession that lasted into 2009. Only then did Washington respond, enacting the Dodd-Frank Act, which tightened federal oversight of the financial industry.

Barely a decade later, history is repeating itself, only the risky bets this time involve not derivatives but crypto currency, an equally opaque, complex, computer-generated industry that has escaped regulation and gone splat. As recently as a year ago, the industry had a market cap of $3 trillion. Now it is worth less than $1 trillion in the wake of the collapse in November of the crypto exchange FTX. Bitcoin, which started it all, is worth less than a quarter of its peak value in 2021, and investors--ranging from sophisticated hedge funds to teenagers--have suffered huge losses. FTX is the canary in the coal mine, just as Long-Term Capital Management was in 1998. Like the calls for government regulation following the derivatives crash, many in Congress and the Biden Administration are calling for new tools to supervise the crypto industry. And once again, it's a belated response--after the damage has been done with the prospect of even greater financial instability if congressional action stalls.

It's a familiar pattern. A new, little-understood industry promising great riches emerges and balloons in value overnight. A few voices in Washington raise concern but Congress, which must pass legislation to grant regulators new oversight powers, does nothing, mainly because lobbyists for the unregulated industry shower members with...