I was excited to moderate yesterday's Brookings debate over whether to regulate crypto because, truth be told, I hadn't quite made up my own mind about it.
My younger self would surely be pounding the table yes, regulate it, you bozos! Look at all the carnage out there! But my older self is more jaded. Regulating crypto seems to me to be not so much about protecting the little guy as about whether to officially allow crypto into the mainstream financial system. By "regulating" it, you're not so much policing it (although on some level you are) as enshrining it. And that to me seems like a very dangerous idea.
After all, the stunning collapse of the crypto industry, which has wiped out $3 trillion of crypto market cap and counting, has had almost zero discernible effect on overall financial stability or the economy. It left the mainstream banking system unaffected, quite unlike the mortgage collapse in '06-07. Let's not forget mortgages were such a sought-after investment at the time--until they blew up--because so many of them were stamped with Fannie or Freddie government backing.
So I am sympathetic to Stephen Cecchetti's arguments for not regulating crypto, which effectively boil down to "let crypto burn." He basically thinks if you just enforced the existing rules (from the SEC on securities, from the bank regulators on loans and capital, etc.) the industry--which he posits exists as a form of regulatory arbitrage--would pretty much disappear. But that's where I differ with him somewhat; I do see real-world innovation in some cases, and not just finance by a different name.
How else do you explain, for instance, Strike? Jack Mallers has been a frequent guest on our shows; a big personality, to be sure, but what really intrigues me is his attempt to build a rival, cheaper payments network to Visa (domestically) and Western Union (cross-border) using Bitcoin. If crypto remains in regulatory purgatory, I could understand that that might be a headwind for the adoption of technology like Strike's in the U.S.
How do you build a regulatory framework, in other words, that helps advance genuine innovations (if you'd call it that) like Mallers' rather than the personal agenda of Sam Bankman-Fried's now-defunct FTX? Perhaps the best way to do so is to chip away at the worst offenses of crypto, which basically just broke old banking laws under the disguise of new technology, without outlawing altogether real-world experiments with the likes of Bitcoin.
So these are what I'd call the takeaways of our hour-long discussion yesterday that you can watch here:
1) Regulate stablecoins as banks. They need a charter; their securities need to be registered; they have to deal with the cost and hassles of being a bank and the regulatory oversight on capital and so on that comes with that territory.
2) Do not pass any laws or legislation about crypto right now. It's way too early days. As Peter Conti-Brown pointed out, it took us a century or more to write proper legislation governing banks and then securities; we should not rush to have Congress get involved here.
3) Do not create a separate, light-touch "crypto" regulator. Instead, force existing agencies to properly enforce existing rules. The SEC in particular does not come out looking great here. It's hard to understand why they didn't move against "tokens" like FTT (which fueled the rise and fall of FTX) sooner.
4) Perhaps most obviously, the definition of crypto needs to be spelled out so as to clarify whether it's a security (SEC oversight), a commodity (CFTC), or otherwise.
5) And finally, keep banks away from it! Prevent and/or monitor any connections between crypto and the traditional financial system.
I asked our experts, what about things like offering crypto as a 401(k) investment option, as many platforms were starting to do prior to the collapse? How would "regulation" have prevented that, and should it have? But to Steve Cecchetti's point, 401(k) plan sponsors have a fiduciary duty and crypto may well turn out to have violated their "suitability" requirements. "I think we're going to see a lot of lawsuits," he said.
So again, many of our existing finance laws may well end up catching up with crypto and rooting out those problematic aspects of it that are just banned practices springing up again under new names. But I agree with Peter Conti-Brown that we need to be careful not to snuff out crypto innovation altogether, and that leaving it entirely unregulated may do so. And I'm not sure, to Hyun Shin's argument, that pushing a central bank digital currency in crypto's place would solve any of these problems.
It will be a very tricky task to clean up crypto in a way that makes the financial system less, and not more, prone to future collapse.
See you at 1 p.m!
Kelly