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The US is a fun country. We have so many financial regulators that we sometimes end up without proper financial regulation. Cryptocurrencies represent the latest example.
The bitcoin trade and its brethren has grown too much to be ignored, and that is what has happened. There are no official public data on prices, volume or volatility. No authority regulates cryptographic exchanges. No one can be sure that investors are adequately protected.
Even people in the libertarian cryptographic world wonder when the federal government will intervene. 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 established and it was suggested that Congress give the job to Gary Gensler, head of the Securities and Exchange Commission.
“When Gary finally tackles it, it will go well,” Novogratz said of his former Goldman Sachs student. “He would love to regulate all cryptography. He has no mandate. “
Everything amounts to a particularly American regulatory failure. Waiting Gensler to get all the cryptocurrencies has become the equivalent of Wall Street waiting for Godot.
The underlying difficulty is that U.S. financial regulation is fragmented. There are several federal banking and market authorities, with overlapping jurisdictions, in addition to state regulatory systems. As Jamie Dimon, CEO of JPMorgan Chase, said annual letter to shareholders: “There is no real authority that can coordinate all moving parts and differentiate bridges.”
In the long run, this is not all bad. Checks and balances are as American as apple pie or good garbage; having so many regulators serves as protection against any of them breaking.
But this system has its weaknesses. New products that are neither fish nor birds in a regulatory sense can fall through the cracks. Crypto is difficult to regulate because it is difficult to define. While true believers call cryptocurrencies, American regulators see them differently. Bitcoin, for example, has been considered a commodity. Other cryptocurrencies are considered values.
This resulting confusion helps explain why neither the SEC nor the Commodity Futures Trading Commission directly regulates cryptocurrency exchanges like Coinbase. No one has given them the job, a source of frustration for regulators.
Congress, in its fashion, is the case. Elizabeth Warren, the Democratic senator, he wrote to Gensler this month to ask if the SEC “has the proper authority to close existing gaps in regulation that leave investors and consumers vulnerable to the dangers in this highly opaque and volatile market.”
Gensler’s response, scheduled for July 28, will no doubt be persuasive. But whether it will encourage lawmakers to act quickly is another issue. If history is a guide, Congress will wait for things to fall apart before deciding how they should come together.
The resulting impasse exacerbates the anxieties that regulators are falling further behind the curve. The crypto hobby reminds many Wall Street veterans of the unregulated increase in delinquency swaps during the years leading up to the financial crisis. Like cryptography, CDSs were difficult to characterize, as they were a form of insurance that was not regulated as such and their proponents considered them too great to be overseen by mere 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 University of Pennsylvania’s Wharton School. “In a way, cryptography is harder than derivatives because it falls into many different regulatory loops.”
The irony for participants in the crypto markets is that they could be better off if a cop like Gensler was already at the pace. The various parts could get to know each other and come up with a kind of accommodation. It could even be a relief, as Novogratz said.
Now, the best way for regulators to control crypto markets may be to go out swinging, using their general enforcement powers to fix things. The SEC has already provided dozens of cases of cryptography. Dan Berkovitz, CFTC commissioner, recently raised doubts on the legality of any derivative agreement that takes place in decentralized finance, or “defi” programs, that use blockchain technology to cut intermediaries.
It could be very interesting. I remember that moment in the movie All about Eva when Bette Davis addresses her guests and presents her forecasts for the afternoon. “Fasten your seat belts,” he tells them, “it will be a rough night.”
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