This reprieve may not last long. Policymakers should act now to impose some much-needed rules on this market.
The problem areas are clear. #1 is stablecoins, or digital tokens that claim to be worth a dollar and are used by speculators to gain leverage or to park funds between bets. At their peak, these coins attracted over $160 billion, which their issuers invested in assets ranging from corporate debt to bitcoin to nothing at all. The danger is that a sudden loss of trust could trigger an exodus, as happened with stablecoin Terra in May. The more regular the assets held by issuers, the greater the risks of larger disruptions – for example, in the markets that real-world businesses rely on to do payroll and raise working capital.
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Another threat arises if commercial banks are exposed to crypto, either directly or through corporate and hedge fund lending. If, for example, major banks had been among the creditors of the now-bankrupt Celsius or Three Arrows Capital entities, which at their peak had tens of billions of dollars in combined liabilities, the crypto meltdown could have caused much greater damage. Fortunately, regulators appear to have avoided such an outcome and remain vigilant, although they have yet to adopt formal rules.
Beyond that, a myriad of digital tokens and trading platforms — including major exchanges operated by Coinbase and Crypto.com — mostly don’t face the same standards of consumer protection, disclosure, governance , security and solidity than traditional assets and financial intermediaries. . The market is therefore plagued by hacks, manipulation, personal trading and outright fraud, as regulators such as the Securities and Exchange Commission and the Commodity Futures Trading Commission struggle to determine how to react and who should be in charge of what.
Ideally, Congress would impose some order. There are many bills, some of which are good. A bipartisan bill would (substantially) require stablecoins to be backed by regularly disclosed high-quality assets and establish oversight of crypto tokens and exchanges. That said, it would also complicate matters by creating a new category of “ancillary assets” for certain digital tokens, and includes questionable measures such as tax breaks for “miners” who process blockchain transactions. Plus, with midterm elections looming, lawmakers are unlikely to move forward any time soon.
Public servants don’t have to wait for Congress. Banking regulators, for their part, have the power to create a limited charter for stablecoin issuers: those who meet the necessary standards, including for assets and governance, could receive privileges such as access to accounts. the Federal Reserve; others would be subject to scrutiny and possible sanctions. Authorities can also adopt strict capital requirements, ensuring that any crypto exposure is funded by equity that banks can afford to lose.
When it comes to tokens and exchanges, the SEC and CFTC should cooperate. It doesn’t matter whether something is called a security or a commodity, as long as some semblance of transparency and accountability is established. To that end, former CFTC Chairman Timothy Massad and Harvard Law School professor Howell Jackson have a promising proposal: Agencies should create an industry-funded organization (similar to the Financial Industry Regulatory Authority) which would set reasonable standards for all relevant cryptographic instruments. and establishments. As with stablecoin issuers, entities that fail to comply would face legal consequences.
The technology underlying crypto can still bring benefits, but the speculative frenzy surrounding it still has the potential to do a lot of damage. Rarely has history given authorities a second chance to deal with such an obvious threat to the financial system. Don’t let it get lost.
More from Bloomberg Opinion:
• Crypto wants SEC rules: Matt Levine
• Crypto fails where digital yuan can succeed: Lionel Laurent
• No, Crypto Exchanges Are Not Like Stock Exchanges: Aaron Brown
The editors are members of the Bloomberg Opinion Editorial Board.
More stories like this are available at bloomberg.com/opinion
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