Crypto has gone mainstream. But where are the watchdogs?

Matt Damon strides past images of humankind’s boldest explorers: ocean voyagers, early aeronauts, mountaineers in a new cryptocurrency ad. If this were an ad for a new drug, or a regulated financial product, you’d expect the images of boldness and bravery to be accompanied by a lengthy disclaimer. You don't. Find out more. Image credit Kanchanara via Unsplash

Cryptocurrency overlaid on $50 bill
Adrian Pforzheimer

Matt Damon strides past images of humankind’s boldest explorers: ocean voyagers, early aeronauts, mountaineers. History is filled with those who almost had adventures, he says. But there are others who embrace the moment of truth and commit, he continues, walking past astronauts. Those who peer over the edge and steel their nerves with four simple words — “fortune favors the brave.” He stops in front of a giant image of Mars.  

The logo for appears onscreen

If this were an ad for a new drug, or a regulated financial product, you’d expect the images of boldness and bravery to be accompanied by a lengthy disclaimer. A disclaimer for the broader crypto market might sound something like this: “Your coins could become worthless at any moment. NFTs may be fraudulent, can suddenly shapeshift and depend on unnamed third parties for access. Boobytrapped tokens may drain your account balance.”

The fact that there is no such disclaimer is a result of the questionable regulatory status of crypto (which I use as a catch-all for the “web3” system of cryptocurrencies, NFTs, and the exchanges to trade them). These products are now at the center of a major advertising blitz, with crypto firms trying to break out of obscurity with the (literal) buy-in of mainstream Americans.

Matt Damon is not the only celebrity A-lister hawking crypto: Tom BradySpike LeeNeil Patrick Harris and Reese Witherspoon are also pitching it. While Damon urges forward the vanguard, Alec Baldwin browbeats the laggards. “You think trading crypto is hard? How hard is it to open eToro, pick a coin and hit trade?” he says. 

Not hard at all! “Social trading” platforms allow you to buy cryptocurrencies without knowing anything about what you’re buying — you can just copy the trades made by the site’s “popular investors.” Crypto exchanges are selling complex, unregulated financial products via super simple, gamified apps. And because anybody with an internet connection can create a new cryptocurrency, the door is wide open for scammers. 

Within the space of one week, two hyped-up cryptocurrencies (inspired by the Egyptian dog god Anubis and the TV show Squid Game, respectively) pulled the rug on investors, shutting down after millions of dollars disappeared. Writing about the latter debacle, Matt Novak wrote, “Scam artists love the crypto space because it’s incredibly difficult to differentiate the scammers from someone who’s earnestly trying to create a legitimate cryptocurrency—perhaps because the idea of making your own currency is inherently fraudulent.”

Crypto’s open secret is that there’s no underlying value to the coins whatsoever — just artificial scarcity. (Its other open secret is the devastating, planet-warming impact of its energy intensity.) For all the talk about the inevitable frontier of finance, art and digital life, right now the majority of cryptocurrencies are a combination of confidence game and Ponzi scheme, whose value only increases to the degree that a “greater fool” will come along and purchase them at a higher price. Even so-called stablecoins, ostensibly pegged to other currencies such as the US dollar, come with serious liquidity risk and could run out of money if many people sell at once.

And, as of right now, there’s no cop on the beat.  

Some would argue that’s the whole point of cryptocurrency. Bitcoin originated as a concept beyond the reach of central banks and their politics, and grew in popularity facilitating anonymous, trustless and sometimes illegal transactions. Crypto currently cuts across the jurisdiction of the Securities and Exchange Commission and the Consumer Financial Protection Bureau. Although the CFPB has recorded hundreds of consumer complaints about crypto, and the SEC has targeted obvious frauds, enforcement activity around crypto has so far been limited.

That may change. It’s rare enough that Republican and Democratic officials agree on an issue, but the SEC chiefs under Presidents Trump and Biden agree that crypto needs to be regulated — and soon. Gary Gensler, the current head of the SEC, has warned that there’s going to be “a spill in aisle 3” which “might just come from a lot of the investing public getting hurt either by fraudsters or by good-faith actors who are promoting and raising money” without giving investors “full and fair disclosures.”

The SEC considers most cryptocurrencies to be securities, so regulating crypto is a consumer protection issue — one that can reduce information asymmetry between insiders and investors, as well as protect consumers from frauds and exploitative fees. Confusingly, however, not all cryptocurrencies are considered to be securities, and in the absence of clear SEC regulations and enforcement, many crypto exchanges continue to claim that laws governing securities don’t apply to them. 

The SEC could clarify matters by issuing formal guidance on what it considers to be a security, and Congress could help (as Gensler has requested) by passing legislation giving the agency the authority to monitor crypto exchanges. In the meantime, a major lawsuit over the status of the “XRP” cryptocurrency is making its way through the courts, and the regulatory status of crypto may hinge on its outcome. 

In the meantime, though, the crypto industry is pouring immense amounts of cash into advertising, with the hopes of convincing more Americans to enter into the chaotic and risky crypto marketplace. Clarifying and tightening consumer protection regulations on crypto is important, but with participation in crypto exploding, time is of the essence.

Sometimes, fortune really does favor the brave. But we would be wise to recall what happened to the originator of that quote, Pliny the Elder:  he sailed towards an erupting Mount Vesuvius and died. Until there’s some form of regulation in the crypto space, buyers should beware. 


Adrian Pforzheimer