Why U.S. regulation failed the cryptocurrency test


The United States is an interesting country. We have too many financial regulatory agencies, and sometimes we end up without proper financial supervision. Cryptocurrency represents the latest example.

The transaction between Bitcoin and its siblings has become so large that it cannot be ignored-but it is the case. There are no official public data on prices, trading volume or volatility. There is no single agency that regulates cryptocurrency transactions. No one can be sure that investors are properly protected.

Even people in the liberal cryptocurrency world want to know when the federal government will step in. Mike Novogratz, the fund manager who helped lead this asset class, told CNBC “Relief” in the market Once the rules of the road are established, it is recommended that Congress transfer this work to the head of the Securities and Exchange Commission Gary Gensler (Gary Gensler).

“When Gary finally solves this problem, it will be good,” Novogratz said of his Goldman Sachs alumni. “He is happy to supervise all cryptocurrencies. He has no authorization.”

All this is equivalent to the failure of US supervision.wait Gensler Mastering all cryptocurrencies has become Wall Street, which is equivalent to waiting for Godot.

The potential difficulty is that US financial regulation is decentralized. There are multiple federal banks and market authorities, overlapping jurisdictions, plus state regulatory systems.As JPMorgan Chase CEO Jamie Dimon put it Annual letter To shareholders: “There is no real authority that can coordinate all parts of the activity and bridge differences.”

In the long run, this is not entirely a bad thing. Checks and balances are as American as apple pie or junk bonds; having so many regulators can prevent any of them from messing up.

But this system has its weaknesses. New products that are neither fish nor poultry in a regulatory sense may fail. Encryption is difficult to regulate because it is difficult to define. Although true believers call cryptocurrencies as cryptocurrencies, US regulators view them differently. For example, Bitcoin is considered a commodity. Other cryptocurrencies are considered securities.

The resulting confusion helps explain why neither the SEC nor the Commodity Futures Trading Commission directly regulate cryptocurrency exchanges such as Coinbase. No one gave them the job-which frustrated the regulator.

Congress is handling this case in its own way. Democratic Senator Elizabeth Warren, Write to Gensler This month asked the SEC whether it “has appropriate powers to fill existing regulatory gaps that make investors and consumers vulnerable to danger in this highly opaque and volatile market.”

Gensler’s response on July 28 will undoubtedly be convincing. But whether it will prompt lawmakers to act quickly is another matter. If history can be used as a guide, Congress will wait for things to fall apart before deciding how to put them first.

The resulting stalemate has exacerbated concerns that regulators will fall further behind the curve. The cryptocurrency boom reminds many Wall Street veterans of the unregulated rise of credit default swaps in the years leading to the financial crisis. Like cryptocurrency, CDS is difficult to describe. It is an unregulated form of insurance and is viewed by its advocates as too cool to be supervised by bureaucracy.

Sarah Hammer, managing director of the Stevens Center for Financial Innovation at the Wharton School of Business at the University of Pennsylvania, said: “We went through a crisis before we focused on CDS and other products.” In some respects, encryption is more challenging than derivatives because it belongs to many different regulatory circles.”

The irony for participants in the cryptocurrency market is that if police officers like Gensler are already in a leading position, they may have a better life. The parties can get to know each other and reach some kind of agreement. As Novogratz said, this may even be a relief.

Now, the best way for regulators to deal with the crypto market may be to waver and use their general law enforcement powers to solve the problem. The SEC has filed dozens of encryption cases. CFTC Commissioner Dan Berkovitz recently Challenge Regarding the legality of any derivative transactions conducted on decentralized finance (or “defi”), the project uses blockchain technology to cut off intermediaries.

It will become very interesting.I found myself thinking of that moment in the movie All about eve When Betty Davis turned to her guests and introduced her predictions for the upcoming night. “Fasten your seat belt,” she told them, “this will be a bumpy night.”

gary.silverman@ft.com

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