The US is a fun country. We have so many financial regulators that sometimes we end up without proper financial oversight. Cryptocurrencies are the latest example.
Bitcoin and its brethren trading has gotten too big to be ignored – and yet it has happened. There is no official public data on prices, volumes or volatility. No single authority regulates the crypto exchange. Nobody can be sure that investors are adequately protected.
Even people in the libertarian crypto world are wondering when the federal government will step in. Mike Novogratz, a fund manager who helped lead the move into the asset class, told CNBC that it was “Relief” in the market once the traffic rules were set and Congress proposed that the job be turned over to Gary Gensler, chief of the Securities and Exchange Commission.
“When Gary finally brings it up, it will be fine,” Novogratz said of his Goldman Sachs alumnus. “He would like to regulate all of crypto. He has no mandate. “
It all boils down to a particularly American regulatory failure. Waiting for Gensler getting your hands on all that crypto has become the equivalent of waiting for Godot on Wall Street.
The underlying difficulty is that US financial regulation is fragmented. There are several state banking and market authorities with overlapping jurisdictions, as well as state regulatory systems. As Jamie Dimon, CEO of JPMorgan Chase, put it in his Annual letter to the shareholders: “There is no real authority that can coordinate all moving parts and bridge differences.”
In the long run, that’s not that bad. Checks and balances are as American as apple pie or junk bonds; Having so many regulators serves as a safeguard against one of them screwing up.
But this system has its weaknesses. New products that are neither fish nor poultry in the regulatory sense can fall through the cracks. Crypto is hard to regulate because it’s hard to define. While true believers call cryptocurrencies, U.S. regulators see them differently. Bitcoin, for example, was seen as a commodity. Other cryptos are considered securities.
This resulting confusion helps explain why neither the SEC nor the Commodity Futures Trading Commission directly regulate crypto exchanges like Coinbase. Nobody gave them the job – a source of frustration for regulators.
Congress is in its kind on the matter. Elizabeth Warren, the Democratic Senator, wrote to Gensler earlier this month to ask whether the SEC has “adequate authority to address existing regulatory loopholes that are leaving investors and consumers vulnerable to danger in this highly opaque and volatile market.”
Gensler’s answer, due by July 28, will no doubt convince. But whether it encourages the legislature to act quickly is another question. If history is a guide, Congress will wait for things to fall apart before deciding how they should have been put together in the first place.
The resulting impasse heighten fears that regulators will fall further behind the curve. The crypto craze reminds many Wall Street veterans of the unregulated surge in credit default swaps in the years that led to the financial crisis. Like crypto, CDS were difficult to characterize as it was a form of insurance that was not regulated as such and was viewed by its proponents as too cool to be overseen by mere bureaucrats.
“It took a crisis to get our attention to 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, crypto is more demanding than derivatives as it falls into many different regulatory rounds.”
The irony for those participating in the crypto markets is that they might be better off if a cop like Gensler was already on the line. The different parties could get to know each other and find some kind of accommodation. It might even be a relief, as Novogratz said.
Perhaps the best way for regulators to get a grip on the crypto markets is to use their general enforcement powers to get things right. The SEC has already filed dozens of crypto cases. Dan Berkovitz, CFTC commissioner, recently doubted on the legality of derivative transactions that take place under decentralized finance or “defi” programs that use blockchain technology to exclude intermediaries.
It could be very interesting. I feel reminded of that moment in the film Everything about Eva when Bette Davis turns to her guests and presents her forecast for the coming evening. “Buckle up,” she tells them, “it’s going to be a bumpy night.”