Don't let the crypto winter go to waste

Don’t let the crypto winter go to waste

The cryptocurrency market has provided US policymakers with a unique opportunity. Less than a year ago, he was on the verge of becoming a systemic threat, garnering followers, leverage and political influence faster than regulators could grasp. Then the danger miraculously dissipated: the market exploded before reaching a critical mass, entering a “crypto winter” that continues to this day.

This delay may not last long. Politicians need to act now to introduce some much needed rules in this market.

Problem areas are clear. No. 1 are stablecoins or digital tokens that are supposedly worth one dollar and are used by speculators to gain leverage or to store funds between bets. At their peak, such coins raised over $160 billion, which their issuers invested in assets ranging from corporate debt and bitcoin to nothing. The danger is that a sudden loss of confidence could trigger an exodus, as happened with the Terra stablecoin in May. The more regular assets that issuers have, the more likely there is to be a wider disruption — for example, in markets that real companies rely on to earn wages and raise working capital.

Another threat arises if commercial banks are exposed to crypto either directly or through lending to companies and hedge funds. If, for example, major banks were among the lenders to the now bankrupt Celsius or Three Arrows Capital, which had tens of billions of dollars in total liabilities at their peak, the collapse of the cryptocurrency could have done much more damage. Fortunately, regulators appear to have averted such an outcome and remain vigilant, although they have yet to pass any formal rules.

In addition, many digital tokens and marketplaces, including the major exchanges operated by Coinbase and, for the most part, do not meet the same standards of consumer protection, disclosure, governance, security, and reliability as traditional assets and financial intermediaries. . As such, the market is rife with hacks, manipulation, amateurism and outright fraud as regulators such as the Securities and Exchange Commission and the Commodity Futures Trading Commission struggle to decide how to respond and who should be responsible for what.

Ideally, Congress would bring some sort of order. There are many proposed laws, some of them good ones. One bipartisan bill would (reasonably) require stablecoins to be backed by regularly disclosed high-quality assets and establish oversight of crypto tokens and exchanges. However, it would also complicate matters by creating a new category of “ancillary assets” for certain digital tokens and including dubious measures such as tax incentives for “miners” who process blockchain transactions. Also, with the midterm elections approaching, lawmakers are unlikely to move forward any time soon.

Officials 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 required standards, including with respect to assets and management, can receive privileges such as access to accounts with the Federal Reserve; others will face strict controls and possible sanctions. The authorities could also impose strict capital requirements, ensuring that any risks associated with cryptocurrencies are funded with equity capital that banks can afford to lose.

When it comes to tokens and exchanges, the SEC and CFTC should cooperate. It hardly matters whether a thing 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 Masada and Harvard Law School professor Howell Jackson have a promising proposal: Agencies should create an industry-funded body (similar to the Financial Industry Regulatory Authority) that would set reasonable standards for all relevant crypto-instruments. and institutions. As with stablecoin issuers, individuals who do not comply with the rules may face legal consequences.

The technology behind cryptography can still do good, but the speculative frenzy that surrounds it can still do a lot of damage. History has rarely given authorities a second chance to prevent such an obvious threat to the financial system. Don’t let this go to waste.

More from Bloomberg:

• Crypto wants some SEC rules: Matt Levine

• Cryptocurrency fails where digital yuan can succeed: Lionel Laurent

• No, crypto exchanges are not like stock exchanges: Aaron Brown

The editors are members of the editorial board of Bloomberg Opinion.

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