Cryptocurrency, like bad medicine, needs regulation
On Jan. 23, the World Health Organization issued “an urgent call to action” regarding “substandard and falsified medical products.” In seven African and Asian countries, parents had purchased overthe-counter cough syrup for their sick children that turned out to be contaminated with diethylene glycol and ethylene glycol. The first is an industrial solvent, the second is antifreeze. Both are poison but have a sweet taste.
The WHO reported that the contaminated cough syrups are “associated with more than 300 fatalities…. Most are young children under the age of five.” Those deaths were from Gambia, Indonesia and Uzbekistan, although the syrups, reportedly manufactured in India and Indonesia, have been found in other countries, too.
The story has the nightmare quality of history repeating itself. As Elsevier’s website ScienceDirect explains: “The first major drug catastrophe in the 20th-century history of the public control of drugs occurred in 1937 in the USA and involved diethylene glycol.”
Sulfa was the first great antibiotic, a precursor to penicillin. In 1937, its sale in the United States was entirely unregulated. A Tennessee manufacturer, S.E. Massengill Co., decided it would be a good idea to sell it in a sweetened elixir.
“Massengill’s chief chemist concocted a solution of 10% sulfanilamide, 72% diethylene glycol, and 16% water,” according to The Scientist magazine, which adds: “The company’s internal control lab approved the solution’s appearance, taste [raspberry], and fragrance.” But it didn’t test the elixir for safety.
Seventy-one adults and 34 children died. And yet Massengill had violated no law. The federal Food and Drug Administration’s only authority was to ensure that drugs in interstate commerce contained the ingredients they claimed to contain, and Massengill’s poisonous elixir met that standard.
The huge public outcry led Congress to pass the Food, Drug, and Cosmetic Act of 1938, which for the first time gave the FDA authority to regulate drugs for safety and efficacy. Out of tragedy was born a key component of the modern regulatory state.
It can be difficult to perceive a regulatory regime when it works the way it’s supposed to. There’s nothing noteworthy about lane markings that are easy to see. Most Albuquerqueans, I suspect, rarely stop to think about the elaborate flood control infrastructure that keeps the Rio Grande within its banks and channels during our summer downpours. And we simply take for granted that, of course, the FDA will prevent poisonous cough syrup from reaching American store shelves.
It’s heartbreaking that parents in Gambia, Uzbekistan and Indonesia cannot have the same confidence in a functioning regulatory system.
Sometimes the importance of regulations only becomes apparent when they’re missing. As, for example, in certain financial markets. At the end of last year, the business pages were filled with news about the collapse of cryptocurrency exchange FTX and the arrest of its founder Sam BankmanFried.
The terms thrown around were all very modern: tokens, blockchain, decentralized networks. And yet the headlines might have been ripped from the newspapers of the 19th century.
Back then, individual American banks issued banknotes, which were essentially bearer checks. As the two-time Pulitzer Prize winner T.J. Stiles writes in his biography of Cornelius Vanderbilt, “Legitimate banknotes were rarely accepted at face value, for fear that they could not be redeemed for the full amount of [gold or silver coins] promised.” The notes’ value dropped steadily the farther they traveled from their banks of origin.
Because the value of banknotes fluctuated, accepting one as payment was a kind of investment, with no guarantee you’d ever get full value for it. If the issuing bank went bust, you’d get nothing. Sound familiar?
Rumors of embezzlement by a bank’s top management could spark a run. Once a run started, depositors needed to drop everything and fight to the front of the line, because there would be no money left for laggards. Just as happened with FTX.
Those of us who stay out of the crypto markets can regard such episodes as quaint history. The Federal Reserve has given us a national currency that retains its value from state to state. Federal deposit insurance consigned brick and mortar bank runs to old movies like “It’s a Wonderful Life.” We’re lucky to be living in an age of such stability.
But cryptocurrency has given us an alternative financial market that exists outside of a comprehensive regulatory framework. There’s much about crypto that is genuinely new — the Larry David endorsement, for example, and the stupendous waste of computing power. But dispensing with regulation is a reversion to the past.
An unregulated financial market is like an unregulated market for over-the-counter drugs. Both are reminders of why we have, and need, regulation.