Regulators Prevented a Crypto-Fueled Economic Slowdown

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To those who said that cryptocurrency will never become a medium of exchange, I’m here to tell you that it has already brought down cryptocurrency businesses. The crypto exchange named Huobi laid off 20% of its staff late last week, and the remaining employees will have to take their salaries in stablecoins, which are supposed to mirror the dollar on a 1-to-1 basis. of working crypto, it should be extremely easy to convert stablecoins to dollars and pay staff with it. The fact that this does not happen suggests that stablecoins are worth considerably less in reality, not to mention the supreme lack of confidence such a decision inspires.

Huobi is just one of many failing companies in the cryptoworld. The implosion of what has been unmasked as a criminal enterprise at FTX has created a chain reaction, where loss of confidence, setbacks in trading volume and potentially similar schemes among FTX’s competitors are devastating the class of nascent assets. This should reinforce the fact that governments’ success in keeping crypto out of the broader financial system has been the most significant regulatory action of the past decade. We rarely give enough credit to agencies that prevent something from happening; it is difficult to prove a negative, as they say. But if we manage to get out of this cycle without a recession, we will have banking regulators to thank, mainly Gary Gensler of the Securities and Exchange Commission.

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Here is a brief overview. FTX is already out of the game and bankrupt. Genesis, a major lender, has just laid off 30% of its staff, after laying off 20% last August. The company is considering filing for bankruptcy. Genesis helped invest Alameda Research and Three Arrows Capital, which themselves filed for bankruptcy, so it was probably unavoidable. Digital Currency Group, owner of Genesis, had Larry Summers on its payroll for six years as an advisor; he quietly stepped aside recently.

Meanwhile, former crypto lender Celsius CEO Alex Mashinsky has been sued by New York Attorney General Tish James to arrest me if you heard this before he defrauded investors by lying about the company’s financial situation. Mashinsky described Celsius as safer than a bank, but he funneled customer deposits into high-risk bets that went bankrupt. His disappointments resulted in losses of around $440 million.

FTX’s direct reverbs also continue. Silvergate, the unassuming bank that was used by crypto firms as a middleman, has seen its shares plummet 84% in the past three months, with crypto-related deposits falling off a cliff and assets being sold off rapidly at who wants them. Law enforcement is engaged in seizing Silvergate accounts as part of the effort to return funds to FTX customers.

The price of Bitcoin has actually risen since its low at the end of the year, but I think it’s clear that the havoc in digital asset markets is far from over. Even Binance, the biggest and supposedly strongest crypto exchange, has been less than clear about its finances and has lost $12 billion in assets over the past two months.

If we manage to get out of this cycle without a recession, we will have banking regulators to thank, mainly Gary Gensler of the Securities and Exchange Commission.

Hedge funds that have done business with Binance are receiving subpoenas related to federal investigations into compliance with anti-money laundering laws. Meanwhile, the SEC, along with Texas securities regulators, have filed objections to Binances’ acquisition of assets from a bankrupt lender named Voyager Digital.

Perhaps the most important decision by banking regulators did not involve a specific company or crypto token. The Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency released a joint statement last week that essentially called on major banks to rethink any idea of ​​holding crypto assets in their wallets. After detailing the many risks associated with crypto, including fraud and scams, misrepresentation and poor risk management by crypto companies, high volatility, legal uncertainties and the potential for digital versions of legacy banking , regulators said: “It is important that crypto-related risks – assets in the industry that cannot be mitigated or controlled – do not migrate to the banking system.

Although the joint statement goes on to say that banks are not legally prohibited or discouraged from providing permitted services to customers, you didn’t have to read between the lines to get regulators’ point. They don’t want to see big banks investing in a bunch of crypto at this point, and they will be watching any such transactions closely. Issuing or holding cryptoassets as principal is very likely to be inconsistent with safe and sound banking practices, the regulators wrote.

The statement was as remarkable for who said it as for what was said. The OCC and the Fed have repeatedly toyed with the crypto industry, with the OCC granting special charters to crypto banks. But now they’ve followed the lead of Gensler, who took the same hard line against owning crypto assets last April, through a bulletin that banks should mark digital assets as liabilities in their balance sheets for accounting purposes. The Genslers newsletter has mostly succeeded in steering banks away from crypto.

Gensler also prevented the creation of an exchange-traded fund made up of Bitcoin funds, which would have made it easier for banks and individuals to gain exposure to crypto, in the same way that derivatives widened the damage of crypto. collapse of the outward housing bubble. only those who physically owned mortgages or mortgage-backed securities to a much larger group of investors.

The SEC’s plea agreements with FTX officials Caroline Ellison and Gary Wang also show how Gensler lobbied to protect the public. The agreements explicitly state that the FTX FTT crypto token is a security, something Gensler has been shouting for nearly two years now. The securities must be registered with the SEC, with the appropriate documentation. None of this is done in the crypto world, which is why companies have resisted the demands of the SEC. If the plea arrangement is successful, the SEC can use that precedent to show that the industry as a whole is not compliant. This would likely end the practice of these tokens, sometimes affectionately referred to as shitcoins, being ripe for abuse.

One of the root causes of the 2008 financial crisis was the failure of regulators to recognize the risks of an ever-expanding housing bubble and to decouple it from the larger system. This lesson was the one Gensler learned in the crypto fiasco. Despite the regrettable vaporization of customer funds, those not involved in digital assets are largely unscathed. The system worked to contain the cryptographic mess. It was the direct result of Gensler’s clever maneuvers, which the rest of the regulatory apparatus now supports.

I’m sure Congress will try to step in and do something about crypto, saying that this unregulated space needs to be tamed. But it is important to recognize that the most important settlement has already been made. Banking and securities regulators shielded the economy from a crypto-fueled downturn. This shows the importance of having the right staff in place to make the decisions. As the digital asset industry continues to falter, at least people who have nothing to do with crypto aren’t paying the price. Keeping this barrier in place should be the goal going forward.

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