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Bitcoin Bingo and the Erosion of Financial Stability
Last week, Bitcoin broke the $52,000 brand, highlighting a double standard in the U.S. financial system.
A slew of federal financial regulators, known by their abbreviations (the FRB, FDIC, OCC, NCUA, SEC, FHFA, CFTC, CFPB, and FSOC) and a host of regulators in each of the 50 states spend valuable resources competing with each other to regulate every aspect and move of banks. However, financial firms that are not banks but engage in bank-like activities—and that make up the bulk of the financial services market—are barely regulated for their financial health and soundness.
Bitcoin is a prime example of the financial threats that asymmetric regulation can create. It serves as both an investment and a currency, though neither is backed by credible value, offering consumers computer code generated by an algorithm invented by someone else. we can’t even findIt is delightfully decentralized, controlled by a group of five people who have the keys to software, and happily devoid of government intervention. This latter characteristic has made it the facilitator of choice for online criminals, terrorists, hackers and traffickers.
Instead of moving towards symmetrical regulation of financial risks, we seem to be moving away from it. Crypto spot ETFs approved by the SEC legitimized floating-rate cryptocurrencies, boosting Bitcoin’s market cap to over $1 trillion and making it the anchor tenant of what has become a A $10 Trillion Crypto Superstructure. Surely something of this magnitude should be considered a potential threat to financial stability?
For comparison purposes, the U.S. mortgage industry, ground zero of the 2008 global crisis, has about $12 trillion in outstanding mortgage loans. U.S. banks have deposits of about $17.4 trillionand stock accounts in U.S. credit unions are lower than $2 trillion. But unlike cryptocurrencies and other non-banks, they are subject to more 12,000 pages federal rules and hundreds of federal and state regulators who scrutinize, question, second-guess and impact nearly every aspect of their business.
The current system of financial regulation in the United States was developed nearly a century ago. We can appoint and hire all the brilliant regulators we want, but when our laws are obsolete, our systems are obsolete, and our regulatory tools are prehistoric, catastrophic financial disasters will occur. events of 2008 and the follies of FTX and Binance This might never have happened if we had developed a more effective surveillance system.
On behalf of financial services users, here is a recipe for achieving greater financial stability.
The first step is to standardize and make the system more efficient by consolidating the regulatory roles of the agencies into a single Financial Services Commission that oversees and monitors the financial soundness and safety of any company – bank or not – that offers a broad range of financial services. This commission should be equipped, like Amazon or Meta, with cutting-edge technological resources and artificial intelligence tools that allow it to anticipate events rather than simply react to them. It goes without saying that the regulatory role of states also needs to be completely rethought, given their lack of resources to deal with today’s online economy (which makes national borders largely irrelevant).
Second, just like the new Cybersecurity Review Committee Established in May 2021, the Legal Affairs and Justice Committee, which includes private sector experts tasked with analyzing cyber disasters, has established a regulatory mechanism for private companies. They have too much power (and too many resources that the government does not have) to leave them on the sidelines, focusing only on why the government is always lagging behind.
Third, a new concept of federal deposit insurance must be developed to better prevent debilitating bank runs like the one that caused demand to plummet. SVB. With instantaneous transmissions of information (true or false) on social networks and only on 55 percent of deposits insured by the FDIC, it has become almost impossible to maintain the liquidity of financial institutions in the event of a financial crisis.
On maintaining financial stability, we know that Congress and the Treasury will indeed provide deposit insurance for nonbank deposits, as they did with money market mutual funds in 2008. 2008 And 2020It wouldn’t be surprising to see the same thing happen in a future cryptocurrency disaster, as their size and market penetration continue to grow. So perhaps it’s time to allow some segments of nonbank financial firms to buy federal deposit insurance if they’re willing to pay for it and be subject to bank-style regulation. At least the fund would then be able to collect premiums for the exposures it actually covers.
Finally, to reduce partisan politics in the oversight of financial institutions, the Senate Banking and House Financial Services Committees should be supported by a new bipartisan Joint Committee on Financial Services, modeled after the Joint Committee on Taxation. This committee would be comprised of an elite group of highly paid and experienced economists, lawyers, accountants, and financial professionals, and would assist members of the majority and minority parties in both houses of Congress in developing sound regulatory strategies and legislation. Ideally, all members of this joint committee would choose not to accept campaign contributions from those within their jurisdiction and would instead receive campaign allowances from taxpayer funds.
Bold problems demand bold solutions, and there is no doubt that technologies like those used by Bitcoin are pushing our traditional surveillance system to the brink of extinction. Politics will undoubtedly stand in the way of change, so let’s be clear about the tradeoffs. If changes like these are not made, future financial meltdowns will cost taxpayers vast sums of money, neither the FDIC (with its meager budget), nor the ECB (with its limited budget). $119.4 billion) nor the Treasury have to spend.
Something has to give.
Thomas P. Vartanian is executive director of the Financial Technology & Cybersecurity Center. A former federal banking regulator and attorney, he is the author of “200 Years of American Financial Panics” and “The Unhackable Internet.”