The Dos and Don’ts of Regulating Crypto

[ad_1]

I was excited to moderate yesterday’s Brookings debate on whether to regulate crypto because, truth be told, I hadn’t made up my own mind about it yet.

My younger self would surely be pounding the table, set it, you bunch of bozos! Look at all the carnage over there! But my older self is more jaded. Crypto regulation seems to me to be not so much about protecting the little guy as it is about whether to officially allow crypto into the mainstream financial system. By “regulating” it, you are not controlling it so much (although on some level you are) that you are consecrating it. And that strikes me as a very dangerous idea.

After all, the staggering collapse of the crypto industry, which wiped out $3 trillion in market capitalization and counting, had almost no discernible effect on overall financial stability or the economy. This did not affect the traditional banking system, unlike the collapse of mortgage lending in 2006-2007. Let’s not forget that mortgages were such a sought-after investment back then – until they exploded – because many of them were stamped with Fannie or Freddie government backing.

So I support Stephen Cecchetti’s arguments for not regulating crypto, which really boils down to “let crypto burn”. He basically thinks that if you just applied existing rules (from the SEC on securities, banking regulators on loans and capital, etc.), the industry – which he says exists as a form of regulatory arbitrage – would virtually disappear. But this is where I disagree with him a bit; I see real-world innovation in some cases, not just finance by another name.

Otherwise, how do you explain, for example, Strike? Jack Mallers has been a frequent guest on our shows; a great personality, sure, but what really intrigues me is his attempt to build a rival, cheaper payment network for Visa (domestic) and Western Union (cross-border) using bitcoin. If crypto remains in regulatory purgatory, I could understand that could be a headwind for the adoption of technologies like Strike in the US.

In other words, how do you build a regulatory framework that helps advance real innovations (if you call it that) like Mallers’ rather than the personal agenda of Sam Bankman-Fried’s defunct FTX? Perhaps the best way to do this is to remove the worst crimes in crypto, which actually comes from breaking old banking laws in the guise of new technology, without completely banning real-world experiences with the likes of Bitcoin.

So here are what I would call the takeaways from our hour-long chat yesterday which you can watch here:

1) Regulate stablecoins as banks. They need a charter; their titles must be registered; they have to deal with the cost and the hassle of being a bank and the capital regulatory oversight and so on that comes with that territory.

2) Do not pass any crypto laws or legislation at this time. It’s way too early. As Peter Conti-Brown has pointed out, it took us a century or more to write proper legislation governing banks and then securities; we shouldn’t be rushing to get Congress involved here.

3) Don’t create a separate, lightweight “crypto” regulator. Instead, force existing agencies to properly enforce existing rules. The SEC in particular is not doing very well here. It’s hard to understand why they didn’t act sooner against “tokens” like FTT (which fueled the rise and fall of FTX).

4) Perhaps most obviously, the definition of crypto needs to be clarified to clarify whether it is a security (SEC oversight), a commodity (CFTC), or something else.

5) And finally, keep the banks away! Prevent and/or monitor any connection between crypto and the traditional financial system.

I asked our experts, what about things like offering crypto as a 401(k) investment option, like many platforms were starting to do before the crash? How would “regulation” have prevented this, and should it have? But according to Steve Cecchetti, sponsors of 401(k) plans have a fiduciary duty and crypto may well be found to have violated their “suitability” requirements. “I think we’re going to see a lot of trials,” he said.

Again, many of our existing financial laws may well end up catching up with crypto and weeding out the problematic aspects of it that are just banned practices resurfacing under new names. But I agree with Peter Conti-Brown that we need to be careful not to completely stifle crypto innovation, and that leaving it entirely unregulated can do that. And I’m not sure, according to Hyun Shin’s argument, that pushing a central bank digital currency instead of crypto would solve any of those problems.

It will be a very delicate task to clean up crypto in a way that makes the financial system less, not more, prone to future collapse.

See you at 1 p.m.!

Kelly

Twitter: @KellyCNBC

Instagram: @realkellyevans

[ad_2]