The Financialization of Crypto: Lessons from FTX and the Crypto Winter of 2022-2023

33 Pages Posted: 3 Mar 2023

See all articles by Douglas W. Arner

Douglas W. Arner

The University of Hong Kong; The University of Hong Kong - Faculty of Law

Dirk A. Zetzsche

Universite du Luxembourg - Faculty of Law, Economics and Finance; European Banking Institute

Ross P. Buckley

University of New South Wales (UNSW) - UNSW Law & Justice

Jamieson M. Kirkwood

National University of Singapore Faculty of Law

Date Written: March 1, 2023

Abstract

Cryptocurrencies, blockchain and decentralized finance were designed to address weaknesses in traditional finance, such as the systemic risk and government profligacy at the heart of many financial crises. Yet, failures of prominent crypto firms highlight the flaws in this argument. Crypto is neither special nor immune and has come to feature all the classic problems of traditional finance. As the crypto ecosystem has evolved, the market failures and externalities of traditional finance have emerged — a process we term the “financialization” of crypto. These include conflict of interests, information asymmetries, centralization and interconnections, large numbers of poorly informed, over-enthusiastic market participants, plus agency, operational and financial risks. We argue that the regulation of crypto needs to learn from the centuries of experience of traditional finance: in order to function properly, crypto requires appropriate regulation and supervision to address market failures and externalities, and to support transparency and efficiency. While it appears the “Crypto Winter” of 2022-2023 has prompted the world’s financial regulators to act, policymakers need to overcome the difficulties posed by decentralization as the underlying paradigm of the crypto industry, which results in a multi-jurisdictional environment of crypto markets, participants, infrastructure and intermediaries. We argue that regulatory systems can (and must) now be instituted to ensure the proper functioning of crypto and its interconnections with traditional finance.

Keywords: financialization, Crypto Winter, financial regulation, FTX, crypto assets, cryptocurrencies, financial stability, decentralised finance, DeFi

Suggested Citation

Arner, Douglas W. and Zetzsche, Dirk Andreas and Buckley, Ross P. and Kirkwood, Jamieson, The Financialization of Crypto: Lessons from FTX and the Crypto Winter of 2022-2023 (March 1, 2023). University of Hong Kong Faculty of Law Research Paper No. 2023/19, UNSW Law Research Paper No. 23-31, Available at SSRN: https://ssrn.com/abstract=4372516 or http://dx.doi.org/10.2139/ssrn.4372516

Douglas W. Arner (Contact Author)

The University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
China

The University of Hong Kong - Faculty of Law ( email )

Pokfulam Road
Hong Kong, Hong Kong
China

HOME PAGE: http://hub.hku.hk/rp/rp01237

Dirk Andreas Zetzsche

Universite du Luxembourg - Faculty of Law, Economics and Finance ( email )

Luxembourg, L-1511
Luxembourg

HOME PAGE: http://wwwen.uni.lu/recherche/fdef/research_unit_in_law/equipe/dirk_andreas_zetzsche

European Banking Institute ( email )

Frankfurt
Germany

Ross P. Buckley

University of New South Wales (UNSW) - UNSW Law & Justice ( email )

Sydney, New South Wales 2052
Australia

Jamieson Kirkwood

National University of Singapore Faculty of Law ( email )

469G Bukit Timah Road
Singapore, 259776
Singapore

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