Published daily by the Lowy Institute

Currency capers: What is going on with regulation of crypto?

The Trump administration has cryptocurrency plans, but reining in bad actors doesn’t appear to be part of it.

The administration has been busy undoing the Biden administration’s efforts to regulate cryptocurrencies (Romain Costaseca via Getty Images)
The administration has been busy undoing the Biden administration’s efforts to regulate cryptocurrencies (Romain Costaseca via Getty Images)
Published 11 Apr 2025 

Money was an amazing invention that drove productivity growth by facilitating exchange. Unlike the old barter systems, when everyone in a market is willing to use a common token with an agreed exchange value a person selling eggs and wanting to buy fish no longer needs to find a fish seller wanting to buy eggs.

The next big step up in productivity came from developing leverage – a trusted entity, let’s call it a bank, offers to hold your surplus cash for you. As long as they are sure that not everyone will want their deposits back at the same time, they can lend out some of this cash to others who can use it to invest in expanding their production. If the bank does its job well the borrower will be able to repay the loan with interest, so the bank can reward depositors to encourage them to save more.

This is the process of money creation through the money multiplier. The starting point is the issue of currency, which, until the introduction of cryptocurrencies in recent years, had been almost exclusively the preserve of banks.

Cryptocurrencies are digital currencies recorded on a blockchain, a digital ledger, and set up mostly by private entities. Most cryptocurrencies have some rule about how they are created that puts constraints on their supply. Their use value comes from their ability to be used in transactions that, at least on first pass, are more difficult to trace, facilitating transactions on the dark web and in scam operations. But speculative hype has seen the value of some, most notably Bitcoin, reach dizzying heights. The list should include memecoins, such as DOGE and $Trump.

The international financial sector architecture established over the last 80 years has been a continual effort to keep up with the innovations of the private sector in financial products.

Some governments have issued their own digital currency (some based on blockchain) and others are considering it. Government (central bank) issued digital currencies differ from those issued by the private sector as, like national currencies (cash) or government bonds, they have a guarantee to convert their digital currency into cash on request.

The international financial sector architecture established over the last 80 years has been a continual effort to keep up with the innovations of the private sector in financial products. This has ranged from the collateralised debt obligations that triggered the 2007-08 global financial crisis to the massive, much of it speculative, options market. The stability of the financial market matters for ordinary people, as they are the ones who suffer when crises bring about recessions and erode the value of their pensions.

This history points to the importance of regulations to maintaining confidence in money and in financial systems. Cryptocurrencies could improve the performance of the financial system by increasing competition, such as in remittance payments, and in bringing financial services to people poorly served by the current financial institutions. But to date too many crypto transactions are “pump and dump” and “rug pulls” as traders seek to take advantage of the gullible.

Regulation is needed to ensure that the public are not misled. Throughout history, banks started by private individuals made their founders rich, but too often collapsed because borrowers could not repay, or depositors wanted their money back at the same time. The Silicon Valley Bank is a recent example of the latter situation. The US Federal Reserve system was established in 1913 following the 1907 financial panic that saw banks collapse as depositors lost confidence.

With digital currencies, the need for regulation is the same. Stablecoins, issued by private entities, need to hold a reserve of liquid assets so the stablecoin can be converted at face value to cash on request. Some, such as Tether, appear to do this (although yet to be audited), others clearly do not. Other cryptocurrencies can be traded on an exchange with a buyer willing to pay cash or another crypto.

But regulations need to ensure that stablecoins are backed with real assets, and that crypto can mature beyond a get-rich-quick, Ponzi-style instrument to one that provides real competition to poorly managed government currencies and financial service providers.

This brings us to the proposed policies of the Trump administration.

First there is the conflict of interest – in addition to the memecoins, Trump and his family are major investors in World Liberty, a platform for borrowing against crypto holdings.

But more worrying are the risks that the Trump administration’s policy agenda poses to the financial system, the ordinary crypto investor, and the primacy of the US dollar. The administration has been busy undoing the Biden administration’s efforts to regulate cryptocurrencies. This includes abandoning a range of lawsuits over misleading behaviour by crypto issuers. Gary Gensler, the crypto hawk head of the Securities and Exchange Commission has been replaced with a crypto-friendly chair. Along with the effective shutdown of the Financial Consumer Protection Bureau, these moves signal that ordinary buyers of crypto will be on their own in dealing with fraud and misleading information.

The same is not true for the big players, who have successfully lobbied for the US government to establish a “Strategic Bitcoin Reserve and Digital Asset Stockpile”. This has the job of stabilising prices, an essential element if crypto is to expand beyond fringe uses in international financial markets, and including if it will ever replace the US dollar.

Financial institutions face considerable regulation because their activities pose systemic risks that governments know they will have to deal with. So far, the crypto industry has extracted government support, while shifting all the risks back to the public. It is pretty clear that the Trump administration will be focused on protecting the interests of the cryptocurrency companies and not the mug punters who dream that crypto will make them rich.




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