The noose around crypto seems to be tightening. Fresh off the fraud conviction of FTX founder Sam Bankman-Fried, US attorneys plan to extract a multi-billion-dollar payment from crypto exchange Binance in return for discontinuing their criminal investigation of it. This follows reports that Binance’s CEO, Changpeng Zhao, has stepped down and will plead guilty to violating criminal US anti-money-laundering requirements.

Although crypto prices have bounced off the depths they plumbed in last year’s crash, they remain well off the highs of their peak two years ago. Even this strength is a bit of an illusion, though. The crypto market’s tenacity is sustained by a relatively small number of traders, who are sticking to their HODL mantra (Hold on for Dear Life). When there aren’t many sellers, it only takes a few bids to drive prices back up. However, signs of fresh demand are growing increasingly scarce. Meanwhile the struggles of crypto exchanges such as Binance and Coinbase are making the sector’s future look increasingly questionable.

As I have previously written, the creation of Bitcoin, the original cryptocurrency, was arguably an act of guerrilla warfare against the Western financial system. When, amid the 2008 financial crisis, asset markets crashed and the banks which had caused the turmoil looked set to collapse, many ordinary folk felt justice was being done. But the central banks rushed to the rescue by flooding the markets with cheap money, thereby boosting asset values. Banker bonuses were soon flowing again.

The public was furious, and Bitcoin’s creators channeled the rage, using a devious hack to exploit monetary policy and expose it as little more than currency debasement. By creating an asset with a fixed supply, its inventors ensured its continued inflation, since the rising supply of money would drive its price ever upwards. And sure enough, from its humble origins at a value of a few dollars, Bitcoin would eventually surge to trade for more than $60,000.

Along the way, though, cryptocurrency picked up true believers who hoped it would free the world from the bankers and no small number of opportunists looking to profit off their faith. It hasn’t always been easy to tell the difference between the two groups. Until it became apparent that he was engaged in dubious schemes, Sam Bankman-Fried convinced many that he would change the world with his “effective altruism”. Once crypto began slumping and the exchanges began stumbling, regulators who had always doubted it, whether because they suspected the entrepreneurs of dodgy dealing or merely disliked their upstart status, began closing in.

Crypto’s fundamental challenge remains. For all the promise of the myriad uses crypto might offer, from decentralising finance to lowering transaction costs, nobody has really come up with a practical use for it yet. It seems to function as a digital substitute for gold — an essentially useless asset that people hold as an inflation hedge (something which is yet to be proven). But that raises the obvious question among traditionalists: why not just stick with gold?

Crypto’s rise has tracked the last decade’s huge expansion of money supply. Now that inflation is forcing central banks to reduce that supply, speculative assets are losing their allure. That means the exchanges which live off them, like Binance and Coinbase, are themselves losing their value.

Unlike FTX, Binance may stick around for a while yet. A large transaction across its own platform earlier this week suggests it has acquired the money to pay the fine, which should enable it to keep operating. But barring a sudden reversal in Western monetary policies, the direction of travel for the crypto exchanges seems more likely down than up. And given the role it played in his fall from grace, Binance’s woes may bring Sam Bankman-Fried a little consolation.

---

John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a religion (Simon & Schuster, 2017).

jarapley

---