Why U.S. regulations fail the cryptocurrency test

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The United States is a strange country. We have so many financial regulators that sometimes we find ourselves without proper financial regulation. Cryptocurrencies are the latest example.

The trade in bitcoin and its brethren has grown too important to ignore – and yet it has. There is no official public data on price, volume or volatility. No single authority regulates crypto exchanges. No one can be sure that investors are properly protected.

Even people in the libertarian crypto world are wondering when the federal government will step in. Mike Novogratz, a fund manager who has helped lead the charge in the asset class, told CNBC that there would be “relief” in the market once the rules of the road were set and suggested to Congress to give the job to Gary Gensler, head of the Securities and Exchange Commission.

“When Gary finally tackles it, it will be good,” Novogratz said of his former student at Goldman Sachs. “He would like to regulate all cryptos. He doesn’t have the mandate.

It all boils down to a particularly American regulatory failure. Waiting for Gensler to get their hands on all the cryptos has become the Wall Street equivalent of waiting for Godot.

The underlying difficulty is that US financial regulation is fragmented. There are several federal banking and market authorities, with overlapping jurisdictions, as well as state regulatory systems. As Jamie Dimon, CEO of JPMorgan Chase, said in his annual letter to shareholders, “There is not one true authority that can coordinate all the moving parts and bridge the gaps.

In the long run, that’s not all a bad thing. The checks and balances are as American as apple pie or junk bonds; having so many regulators serves as protection against one of them messing up.

But this system has its weaknesses. New products that are neither fish nor poultry in the regulatory sense may fall through the cracks. Crypto is difficult to regulate because it is difficult to define. While true believers call cryptocurrencies, US regulators see them differently. Bitcoin, for example, has been viewed as a commodity. Other cryptos are considered securities.

This resulting confusion helps explain why neither the SEC nor the Commodity Futures Trading Commission directly regulates crypto exchanges like Coinbase. No one gave them the job – a source of frustration for regulators.

Congress, in its own way, is on the case. Elizabeth Warren, the Democratic senator, wrote to Gensler this month asking if the SEC “has the proper authority to fill existing regulatory loopholes that leave investors and consumers vulnerable to the dangers of this very opaque market. and volatile “.

Gensler’s response, due on July 28, will undoubtedly be convincing. But whether that will push lawmakers to act quickly, that’s another matter. If history is any guide, Congress will wait until things fall apart before deciding how they should have been put together in the first place.

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The resulting stalemate heightens fears that regulators are falling further behind. The crypto craze is a reminder to many Wall Street veterans of the unregulated increase in credit default swaps in the years leading up to the financial crisis. Like crypto, CDS were difficult to characterize, being a form of insurance that was not regulated as such, and were seen by their advocates as too cool to be overseen by ordinary bureaucrats.

“It took a crisis to focus our attention on products like CDS,” said Sarah Hammer, executive director of the Stevens Center for Innovation in Finance at the Wharton School at the University of Pennsylvania. “In some ways, crypto is more difficult than derivatives because it enters many different regulatory rounds. “

The irony for crypto market participants is that they might be better off if a cop like Gensler was already up to speed. The different parties were able to get to know each other and come to some sort of accommodation. It might even be a relief, as Novogratz said.

Perhaps the best way for regulators to get a handle on the crypto markets now is to step out of the ordinary, using their broad enforcement powers to set the record straight. The SEC has already brought dozens of crypto cases. Dan Berkovitz, commissioner of the CFTC, recently questioned the legality of any derivatives deal reached on decentralized finance programs, or “challenges,” which use blockchain technology to weed out middlemen.

It could get very interesting. I remember that moment in the movie All About Eve where Bette Davis turns to her guests and presents her forecast for the evening ahead. “Fasten your seat belts,” she told them, “it’s going to be a rough night. “

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