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In a famous 1993 article, the late US Senator Daniel Patrick Moynihan lamented that behaviors once considered aberrant, such as unwed parenthood, were being normalized. He called this process “defining deviancy down.” (A more recent example might be the epidemic of gun violence in America today.) Social problems once considered shocking and deserving of aggressive public policy intervention were increasingly taken for granted as acceptable. Moynihan’s insight built on work of the great sociologist Emil Durkheim, who argued that societies have a relatively stable capacity for shaming. They tend to adjust what falls into the “deviant” category to maintain a constant level of punishment.

Moynihan’s analysis is quite relevant to the crypto space today.

The sudden collapse of FTX, one of the pillars of the crypto market, revealed extensive misbehavior and deception. It came on the heals of blow-ups of other major platforms such as Celsius and Terra Luna. Commentators have been, unsurprisingly, quick to celebrate the confirmation of their priors. Is FTX proof that crypto is an irredeemable cesspool of corruption that never has or will generate any real value? That its once-celebrated CEO Sam Bankman-Fried was a degenerate interloper from traditional finance who never shared the ideals of the crypto community? That politicians are on the take and looking the other way when they should be enforcing the law? That only Bitcoin, or only decentralized DeFi protocols, are the “real” crypto revolution? The answers to these questions frame any analysis of what the response to the FTX mess should be.

I think there’s a deeper issue here. FTX, whose logo adorned major sporting events and whose CEO appeared on the cover of business magazines, appears to have been built on systematic fraud and market manipulation from its earliest days. Commenters are coming out of the woodwork to reveal shocking story after shocking story that should have been red flags for those who poured billions of dollars into FTX. Yet the con succeeded for so long. Why?

FTX logo being removed from the Miami Heat’s arena

Go back to Moynihan. So much of FTX’s and SBF’s activity was, under mainstream standards, deviant for a major global financial services firm. That includes a 20-something CEO with wild hair who wears T-shirts in the office, sleeps on beanbags, and plays video games during important meetings. More significantly, though, it includes a set of dangerous business practices.

I’m not talking about the out-and-out fraud now coming to light. I’m talking about things like risky margin trading in derivatives with extreme leverage, extreme yields offered on self-created tokens with no transparency, simultaneously operating a firm that could trade against its customers, secret lending transactions involving discounted stablecoins, and acquiring huge stakes of new tokens that it pumped up in price and then dumped on retail investors. These are the practices that US-based crypto exchanges such as Coinbase, Kraken, and Gemini, or FTX’s US affiliate, are prohibited from engaging in, even under the America’s limited regulatory structure for digital assets. They create serious conflicts of interest and opportunities for investor exploitation. And yet, such practices were entirely normalized in the booming crypto trading market after 2017. All the big offshore exchanges operate this way.

There is no question that the US needs a more extensive and coherent legal regime for digital assets, as well as more aggressive regulation. The goal, however, shouldn’t be to give Americans better access to a rigged crypto casino. It should be to ensure that appropriate lines are drawn between legitimate and illegitimate practices, building on many decades of experience with financial regulation. The technology is new, the mechanisms are more sophisticated, and digital communication allows financial activity to ramp up far more quickly than in the past. Yet the patterns of misbehavior are all too familiar. The practices we’re seeing today in crypto resemble those in the mortgage market before the Global Financial Crisis of 2008, on Wall Street in the years before the Crash of 1929 and the Lombard Street of Walter Bagehot’s 19th century Money Market. The end result is always the same.

We need to take a step back and question which aspects of the crypto trading market are legitimate, and which should be considered deviant. Offshore exchanges such as Binance and Bitfinex are now claiming a mantle of legitimacy just because they haven’t yet imploded or been shut down. That’s backwards. Both major market participants and regulators need to insist on standards. Investors shouldn’t be prevented from taking risks, and outdated rules such as the accredited investor standard in the US should be updated. But at the end of the day, there must be a credible claim that crypto markets, like traditional financial markets, serve the interests of society, as fair engines of capital formation.

There is nothing more precious than trust, a concept at the heart of my book about blockchain and digital assets. Trust, however, is not the same as truthworthiness. We must take some risk in order to trust. Our assessments of those risks depends, in part, on collective norms. We are far more likely to go along with something that everyone else seems to find acceptable. For digital asset markets to reach their potential as legitimate venues for financial activity, it is imperative following the FTX collapse to question whether the industry has defined deviancy down. The stories emerging about amphetamine-fueled escapades in the Bahamas among young FTX executives make good copy, but that’s ultimately not the behavior to focus on. What’s most important to understand about FTX is not how it differed from other questionable offshore crypto platforms; it’s how it didn’t.