Crypto investors have lost $2 trillion. There’s plenty of blame to go around, but what now?

“You can’t understand it, but it’ll make you money” is the oldest line in the financial industry charlatan’s handbook.  That’s bad enough. But add technology mumbo jumbo to the conversation and you’ve got a recipe for obfuscation and consumer harm — you’ve got “FinTech” — well, you’ve got cryptocurrency.

That nugget of wisdom was dispensed today by Hilary Allen, a law professor at American University, during a panel discussion presented by the American Economic Liberties Project. That organization is leading the charge against monopolies in the U.S. economy — if you don’t know about it, you should — but today a group of skeptics took on the aftermath of the ongoing crypto market collapse.  It’s simple, really: charlatans prey on naive “tourists,” who are easy to exploit. If you’ve ever been taken for a ride by a taxi in a strange country, you understand the tourist problem. Today, Gotcha Capitalists create situations where nearly everyone is a tourist, then exploit the easy marks. That’s what we’ve seen in cryptocurrency during the past several years, as people who couldn’t define crypto bought and sold trillions of dollars worth of what are essentially spreadsheet entries, egged on by the world’s most famous people.

Indeed, $2 trillion in crypto wealth has vaporized in the past 12 months, much of it lost by victims left largely unprotected by U.S. regulators, who are now charged with cleaning up the mess.  It’s (essential to note that for now, the larger banking system has not been pushed to the brink by this mess — as it was by the collapse of the housing bubble — and regulators do deserve credit for that.)

This is mostly old news to you, I suspect. Today’s panel discussion was more forward-looking: What now?  I recommend you invest an hour watching this replay if you can.

Recently, I asked another panel of experts whether the collapse of FTX and the arrest of SBX constituted a Lehman Brothers moment or a Bernie Madoff moment.  You can scan their opinions here.  I’ve made no secret of my opinion that crypto is a Ponzi scheme, with no real product of value at its core, meaning some lucky people might actually walk away with money, but in the end most people are going to be hurt.  Could I be wrong? Sure.  But only people who genuinely understand finance and tech should even toy with the idea of investing in crypto.  I’m here to tell you that the Venn diagram overlap is very small.

It’s long been said that crypto is a solution looking for a problem, a phrase popular in the tech startup world.  I now think that’s backward. The problem crypto exploits is clear. People don’t trust governments.  They don’t trust currency. They don’t trust inflation.  And they sure don’t trust the banking system.  And…..they are right!  There are good reasons for all that skepticism. Anyone who can roll all that mistrust into an action item would succeed right now.   Crypto came along at precisely the right time (for the record, during the last financial collapse).

Crypto was gold without the baggage, and with some very attractive features.  You could send money across national boundaries without paying extortionist rates! Instantly!  With equal opportunity for all! And all the while, you could get that satisfying hit of dopamine for screwing the man, doing something outside the prying eyes of your bank and your government (at least, it felt like that).

Alas, while crypto galvanized the masses (even LeBron!) about the problem, it solved nothing.  Crypto wasn’t ever really a currency, was never really private, was never really disruptive, and the gold rush was not evenly distributed.  It was a problem in search of …. victims.

So what now?  Is there some way to allow financial innovation to thrive, so one day some other vehicle (crypto 2.0? Gah) might really solve these problems?  I’ll be as happy as the next person when some new product arrives which will put bank Gotcha fees on notice.  Unfortunately, the strong libertarian bent to the FinTech world is not going to like the answer: Only if strong government regulation walks hand in hand with financial innovation.  The time to experiment with grandma’s and grandpa’s retirement fund just to see what happens is over, or should be.  Aggressive transparency is absolutely essential. Real-time monitoring of even small FinTech firms should be required.  It’s criminal that U.S. markets allow problems to fester and become trillion-dollar-sized before the Feds step in.

Meanwhile, as I’ve chronicled in several other places, the real problem — the real vulnerability — exploited by the crypto snake-oil salesmen was poor customer service.  There’s a very good reason people hate the banking system. After years and years of exploitation by firms like Wells Fargo, consumers are dying for a disruptor to make moving money around a little more fair.  Remember,  people hated Blockbuster and its late fees so much they signed up by the millions to get movies mailed to them by the USPS!  Just imagine how ready they are for an alternative to getting screwed constantly by Big Banks.  I’ve given examples again and again: Misbehaving companies with terrible customer service drive consumers into the arms of criminals.  That’s the real problem in search of a solution.

The real innovation isn’t going to be an app. It’s going to be restoring trust.

We’ll see how well America learns from the crypto collapse.  Unfortunately, we’ve seen this movie before.  Some excellent reforms came out of the housing bubble collapse, such as the Consumer Financial Protection Bureau, but well-moneyed forces nearly torpedoed it. And, as I’ve learned since my days covering tech stocks during the dot com bubble, a crisis like this seems to happen just about every 10 years — every time there are new tourists in the financial world, convinced they can make money investing in products they do not understand.  Since we know this will happen, it sure would make sense to at least try to prevent it.