White House stance on crypto calls for roadblocks for traditional financial firms

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The time of dreams

Cryptocurrencies received a major blow last week after the White House called on Congress to do more to regulate the nascent and volatile market.

Many have called for more regulation in the digital asset space following the collapse of crypto exchange FTX in November and the subsequent bankruptcies of lenders Genesis Global Capital and BlockFi. Among the measures suggested by the White House was increasing transparency and disclosure requirements for crypto companies to make customers more aware of the risks.

But Friday’s missive from the White House has implications for businesses outside of the crypto-sphere and urges Congress not to take steps that would make it easier for traditional financial players, or TradeFi firms, to enter the world. space.

The legislation should not give traditional institutions, like pension funds, the green light to plunge headlong into cryptocurrency markets, the White House wrote, noting that much of the traditional financial space avoided the crypto calamity by not being exposed to it. It would be a grave mistake to enact legislation that reverses course and deepens the ties between cryptocurrencies and the broader financial system.

Although the fallout from crypto has been limited, there have been losers in the traditional financial space. Silvergate Capital (ticker: SI) has seen its shares plunge 87% in the past 12 months while Signature Banks (SBNY) has fallen 57%.

Silvergate, in particular, is in a tough spot. Falling crypto prices have certainly hurt the stock, but the prospect of greater scrutiny poses other risks. In the extreme case, if crypto were fundamentally regulated, the bank would lose what was supposed to be its tailwind: experience in a new industry. On the other hand, if regulation paves the way for large traditional financial firms to add crypto to their offerings, Silvergate, with its market capitalization below $500 million, would likely not be able to compete at scale.

Last November, the Federal Reserve Bank of New York said it was working with 10 major financial institutions to create a central bank digital currency (CBDC). Silvergate was looking to launch its own stablecoin, which is a digital asset whose value is pegged to the US dollar or another currency. A CBDC is a digital currency issued and regulated by a central bank, which essentially obviates the need for privately issued stablecoins. Silvergrates shares fell 11% on November 17, a day after the New York Fed announcement.

Meanwhile, Silvergate said last week it was suspending dividends to boost liquidity.

The White House said Friday that it supports responsible technological innovation, but its posture and talks of more safeguards suggest it will be a long time before it embraces crypto.

Write to Carleton English at [email protected]

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