Bitcoin Bingo and the Erosion of Financial Stability

Last week, Bitcoin breached the $52,000 level, highlighting the double standards in the US financial system.

A collection of federal financial regulators known primarily by their abbreviations (FRB, FDIC, OCC, NCUA, SEC, FHFA, CFTC, CFPB, FSOC) and numerous regulators in each of the 50 states compete with each other for valuable resources. I am. Regulate all aspects and movements of the bank. However, financial companies, which are not banks but have similar activities and make up a large portion of the financial services market, are largely unregulated with respect to their financial health and strength.

Bitcoin is a clear example of the financial threat posed by asymmetric regulation. It serves as both an investment and money, but neither is backed by any reliable value and provides consumers with computer code generated by an algorithm invented by someone we can't even find. . It's attractively decentralized, controlled by his group of five people who have the keys to the software, and gleefully free of government intervention. The last feature makes it a perfect tool for online criminals, terrorists, hackers, and human traffickers.

Rather than moving towards symmetric regulation of financial risks, we seem to be moving further away from it. The SEC's approval of Spot Crypto ETFs legalized floating rate cryptocurrencies and pushed Bitcoin's market value past $1 trillion, making it the anchor tenant of the $10 trillion cryptocurrency superstructure. Surely something of that magnitude should be considered a potential threat to financial stability?

For comparison, the U.S. mortgage industry, which was the epicenter of the 2008 global crisis, has approximately $12 trillion in outstanding mortgage loans. There are about $17.4 trillion in deposits in U.S. banks and less than $2 trillion in stock accounts in U.S. credit unions. But unlike cryptocurrencies and other nonbanks, they are subject to over 12,000 pages of federal rules and hundreds of federal and state regulators that scrutinize, question, speculate, and influence nearly every aspect of business. I am affected.

The current system of financial regulation in the United States was developed nearly a century ago. We can appoint and hire all the good regulators we want, but our laws will be outdated, our systems will be obsolete, and our regulatory tools will create prehistoric and catastrophic financial disasters. . If we had developed more effective monitoring systems, the events of 2008 and the folly of FTX and Binance may never have happened.

On behalf of users of financial services, we offer one recipe for achieving greater financial stability.

First, consolidating the regulatory roles of each agency into a single Financial Services Commission, which oversees and monitors the financial strength and safety of any company (bank or non-bank) that provides a broad suite of services. should bring uniformity and efficiency to the system. of financial services. Like Amazon and Meta, they need to have cutting-edge technological resources and AI tools to be able to predict events rather than just react to them. It goes without saying that the regulatory role of states also needs to be completely rethought, given the lack of resources to deal with today's online economy (so state borders mean little) ).

Second, there must be a regulatory role for private companies in financial regulation, as well as the new Cyber ​​Safety Review Board, which includes private sector experts in its post-mortem review of cyber disasters, established in May 2021 . They have too much power (and resources that governments don't have) to be left on the sidelines, focusing solely on why governments are always shortchanged.

Third, we need to develop a new concept of federal deposit insurance that can better protect against the kind of financial decline that brought down the SVB. Maintaining liquidity for financial institutions during a financial crisis is nearly impossible as information (true or false) is transmitted instantaneously on social media and only about 55% of deposits are insured by the FDIC. It has become.

When it comes to maintaining financial stability, we know that Congress and the Treasury Department will effectively provide deposit insurance for non-bank deposits, as they did for money market mutual funds in 2008 and 2020. It wouldn't be surprising if the same thing happened. As the size and market penetration of cryptocurrencies continues to grow, there is a potential for future crypto disasters. So perhaps it is time to allow some nonbank financial companies to purchase federal deposit insurance, provided they are willing to pay and subject to the same regulations as banks. That would at least allow the fund to collect premiums on the exposures it actually covers.

Finally, to reduce partisan political interference in the oversight of financial institutions, the Senate Banking Committee and the House Financial Services Committee will support a new bipartisan Joint Financial Services Committee modeled after the Joint Committee on Taxation. I need to receive it. The organization is staffed by an elite group of highly compensated and experienced economists, lawyers, accountants, and financial experts who help majority and minority members in both chambers of Congress establish sound regulatory strategies and legislation. We will support you. Ideally, all members of this joint committee would opt out of receiving campaign contributions from the entities under their jurisdiction, and instead their campaigns would be funded with taxpayer funds.

Overwhelming problems require bold solutions, and there is little doubt that technologies like the one used in Bitcoin are pushing our traditional surveillance systems to the brink of extinction. . There is no doubt that politics gets in the way of change. So be clear about the trade-offs. If such changes are not made, future fiscal failures will cost taxpayers huge costs that neither the FDIC (just $119.4 billion) nor the Treasury Department will have to spend.

Something has to give.

Thomas P. Vartanian is Executive Director of the Financial Technology & Cybersecurity Center. A former federal banking supervisor and practicing attorney, he is the author of 200 Years of American Financial Panics and The Unhackable Internet.