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House Cryptocurrency Bill Sows Seeds of Next Financial Crisis
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by Mark Hays, Opinion Contributor 05/22/24 12:00 PM ET
A booming new financial player, once considered invincible, is on the verge of collapse due to mismanagement and reckless bets gone wrong. Congress holds hearings. Regulators propose measures to curb speculation and increase transparency and oversight. But the industry says the approach is burdensome and harmful to investors. An industry champion advocates for a lighter-touch regulatory approach—and wins.
This scenario, taken from the derivatives industry of the 1990s, has eerie parallels to today, as House Considers Cryptocurrency Legislation. THE Financial Innovation and Technology for the 21st Century ActThe industry says the bill will foster innovation while protecting consumers. But there is concern that it could be a repeat of the past: a bill that would promote weak regulation of cryptocurrencies and undermine investor protections.
In the 1990s, the firm was called Long-Term Capital Management.a hedge fund. In 1998, the firm nearly went bankrupt because of a series of bad trades that cost it $4.6 billion. To prevent contagion, the New York Fed and private firms stepped in with cash injections. Congress then held hearings, a presidential task force studied the issue, and the Treasury came up with regulatory ideas for the esoteric financial products that brought down LTCM, known as swaps and over-the-counter derivatives.
But then there was a changing of the guard.
Lawrence Summers notably replaced Robert Rubin as Treasury Secretary. Suddenly the word was that derivatives and swaps needed to be less regulated. Summers argued that “these products have transformed the world of finance” and that a “cloud of legal uncertainty” over the sector could “discourage innovation and growth… pushing transactions offshore.”
Shortly thereafter, Congress approved his recommendations, and then-President Bill Clinton signed a deregulatory bill, the Commodities Futures Modernization Act. As one expert later said: “Although many factors contributed to the 2008 financial crisis, it is now almost universally acknowledged that the most significant of these was the collapse of the unregulated swaps market.”
The parallels between this ancient crisis and today’s cryptocurrency are striking. Sam Bankman-Fried has been lauded by the press media, celebrities And Congress until his company FTX collapsed in scandal. Congress then held hearings expressing outrage and calling for reform. Quickly, the crypto industry rebalanced, declaring FTX an outlier and insisting that the real problem was onerous regulation and legal uncertainty. from the Securities and Exchange Commissionled by Gary Gensler, which stifled crypto innovation and deprived companies of offshore economic opportunities.
Echoing the 1990s, Summers even made a cameo appearance as paid advisor for cryptocurrency businessestouting the economic potential of crypto, despite his past dubious appeals.
This crypto bill is the An original idea from the industry lobby and his friends in Congress, and it showsThe bill uses an obscure definition of decentralized cryptocurrency technology to legitimize the industry’s risky practices. It gives primary regulatory authority over cryptocurrency markets, via an automatic self-certification process, to the Commodity Futures Trading Commission, an underfunded and understaffed agency with no mandate to protect retail investors.
Until the bill’s rules are set, it exempts cryptocurrency businesses from ongoing regulatory enforcement actions. All of this comes at the expense of SEC oversight and its stronger investor protections. What little SEC oversight remains is watered down, so that even online crowdfunding schemes to raise capital would face more scrutiny than many cryptocurrency businesses.
The bills worst feature rewrites longstanding securities law to benefit cryptocurrencies by exempting a broad range of crypto products from the definition of “security” in the SEC’s authorization law, even though many crypto products are clearly securities and should be regulated as such. This loophole would erode key protections for cryptocurrency buyers and create a road map for traditional Wall Street firms to evade existing rules, potentially fueling more risky speculation and harming a broader range of investors, even if they never touch cryptocurrencies.
Will Congress remember the lessons of the 1990s? Some see this vote as being largely about currying favor (or avoiding the wrath) of crypto super PACs fueled by a few Silicon Valley billionaires who have everything to gain and who are promising to spend Tens, if not hundreds, of millions of dollars will be spent this election cycle. Others really want to protect crypto investors, but don’t know how. Many know little about crypto or financial regulation in general and are told that this bill is a step forward. But that’s a recipe for trouble.
Policymakers need to take this issue seriously and stand up for the public interest. There may be a cryptocurrency regulation proposal that would strike the right balance, but that is not the case here. On the contrary, this bill could sow the seeds of a new financial crisis. If members of Congress do not want their vote to be the first chapter in the story of this crisis, they should vote against this bill.
Mark Hays is a senior policy analyst at Americans for Financial Reform and Demand Progress.