Despite evidence that the cryptocurrency industry is at the heart of a huge scam that threatens the wider economy, the Biden administration refused to set stricter rules.
The President’s Working Group on Financial Markets, a multiagency initiative tasked with attempting to ensure market orderliness, said in a report released on November 1Stablecoins, which are also known as bitcoins, should be regulated in the same way banks. However, it would be up for Congress to establish such a regulatory framework.
Cryptocurrencies consist of encrypted public records that demonstrate an entity’s ownership over the record, and transactions that the record facilitates. Advocates claim that cryptocurrencies improve privacy and revolutionize payment processing. However, their use-value has not been established. widely questionedCriticisms that view the market a highly speculative bubble waiting to burst. The computing power that can be used to obtain, or “mine,” certain cryptocurrencies also increasingly contributes to global carbon emissions, as those who question the benefit of the industry often point out. University of Cambridge research found that Bitcoin mining consumes more energy per capita than the entire population of Argentina.
Stablecoins can be tied to another asset, such as the U.S. dollars, even though prices for most cryptocurrencies like Bitcoin fluctuate greatly. They are used to lend and borrow money in cryptocurrency financial markets, and to speculate on the prices for various tokens like Bitcoin.
Stablecoins are attractive for those interested in speculating on cryptocurrency because it’s easier to trade one type of token for another using stablecoins than it is to convert the token into fiat currency, and then into another type of token. Gary Gensler is the chair of Securities and Exchange Commission (SEC), which is the top stock market regulator. called stablecoins “poker chips at the casino.”
Industry trade groups hailed the Biden administration’s decision, with some noting that Congress is very unlikely to act on the recommendations anytime soon. Public interest groups, however, decried the move, stating that regulators were playing with fire by sitting on their shoulders and that the government already has all the authority it requires to control abuses.
“Unless federal regulators take prompt and effective action to deal with stablecoins, there is a grave danger that the $120 billion dollar stablecoin market will pose severe operational and systemic threats to our financial system,” Americans for Financial Reform (AFR) said in an open letterTreasury Secretary Janet Yellen was published in anticipation of the report on October 19.
Todd Phillips, director of financial regulatory and corporate governance for the Center for American Progress, said he was “very disappointed by the political aspect of this decision.”
“Congress is not going to enact the very narrow statute that the President’s Working Group recommends,” he told Truthout. Phillips said that the report’s authors “have given a big gift to the crypto industry, which has been saying: ‘We need Congress, regulators cannot do it.’”
Phillips explained that the Federal Deposit Insurance Corporation (FDIC) already “has legal authority to decide what are bank deposits.”
“There are likely ways the FDIC could grant deposit insurance to stablecoins, and it’s disappointing that no one has articulated what that would look like, or what actions the FDIC could take to make that a reality,” he remarked.
Renita Marcellin, a senior policy analyst for AFR, bolstered this argument, saying that regulators can already “put stablecoins under the full banking regime,” if they wanted to.
“We can say you have to get a national bank charter and be regulated by the [Office of the Comptroller of the Currency], you have to get deposit insurance, you have to submit to prudential regulation,” she said, referring to rules forcing banks to keep money and other assets on hand to weather rough patches.
Marcellin stated that regulators could also decide not to treat stablecoins as securities. These are generally defined by case law and considered investment products. In the 1982 case Marine Bank v. Weaver, the Supreme Court ruled that deposits which aren’t subject to federal banking regulations are securities.
The market for stablecoins has grown by more than 500% in the past year. It is now worth approximately $138 billion. The overall market for cryptocurrency has grown roughly in line with this trend, and is now worth almost $138 billion. $3 trillionDespite sharp market contractions in spring, the value of cryptocurrencies has risen by approximately 650 percent over the past year. The hope that cryptocurrency would fuel the growth has been the driving force behind this increase. one dayThe currency has been widely used in payment systems and a speculative frenzy that was driven by aggressive marketing campaigns that included prominent celebrities such as Kim Kardashian Matt Damon, and major corporations that are not financial such as Burger King.
Growth in the stablecoin market has worried regulators because the market looks set to fail in a time of distress — a scenario that could cause the price of various cryptocurrencies to plummet, considering many token purchases are financed with stablecoins. This scenario could lead to losses for the financial sector, as more hedge funds are exposed to cryptocurrency.
People who are least likely have any financial assets will suffer the most. Economic recessions that are triggered by financial distress can often be caused or exacerbated by systemic financial distress. These tend to be the most devastating for the poorest.
There are numerous doubts about the reliability of the most widely used stablecoin (USDT), which is advertised as being backed one to one by the national currency that bears it name. Tether, which is the company that issues USDTs, has settled allegations made by federal and state regulators. Tether was accused of not having the assets necessary to back up USDTs. The company is also currently under investigationThe Justice Department is investigating allegations that it has committed bankfraud.
Tether reached an agreement with Letitia James, New York Attorney General, in February to pay $18.5million and cease operations in New York. Tether reached an October agreement to pay $41 million in penalties to the Commodity Futures Trading Commission (CFTC), which found that the company only had enough cash to back up its token for “27.6% of the days in a 26-month sample time period from 2016 through 2018.”
Journalists have also found Tether incapable in proving that it has enough liquidity to keep its USDT peg. A BloombergOctober, investigation published found that the company has used its reserves to make risky bets, such as loans backed up by Bitcoin, and that Tether’s chief financial officer has used company reserves to make personal investments. The piece noted that if the company’s critics are correct “and Tether is a Ponzi scheme, it would be larger than Bernie Madoff’s.”
Madoff, a former wealth management executive, duped thousands of people out. $64.8 billion by taking cash from more recent clients and using it to pay older clients instead of investing the money — the textbook definition of a Ponzi scheme. Madoff stopped receiving new clients in 2008, and the scam fell apart. There are approximately half of the global stablecoin markets in the world, with $73 billion USDTs and $52 billion being issued this year.
Tether was reportedly on the mind of Secretary Yellen when she first convened the President’s Working Group on Financial Markets in July to discuss stablecoins. Yellen was concerned the company “had gotten so large that it threatened to put the U.S. financial system at risk,” according to last month’s Bloomberg investigation. (She was also worried about the stablecoin market because of Facebook’s interest in entering it, citing the firm’s ability to reach almost half the world’s population on a monthly basis.)
Yellen wasn’t alone among regulators worried about Tether posing a wider risk to economic well-being, either. OfficialsThe Federal ReserveConcerns about the possibility that Tether could be run had been raised by some. Runs are when clients try to withdraw their money simultaneously from a financial institution that lacks the assets to fulfill the requests. They are most often associated with losses in deposits and the failure of the firm.
Runs are often associated to the black-and-white images that depict long lines for bank withdrawals in the early days of the Great Depression. However, there have been several high-profile instances of runs in recent U.S. history. Most of these runs were centered around nonbank financial firms. During 2008’s meltdown, there was an equivalent of a run. insurance giant AIG, as institutional investors attempted collect on bets to stop the imploding housing markets. The world was shaken by the release of COVID-19 on March 2020. investors rushedTo withdraw their cash from U.S.-based Money Market Funds. These funds consist of short-term credit agreements that corporations depend on to keep current on debt payments. Both of these situations led to Federal Reserve bailouts as well as wider economic turmoil.
Financial distress had a knock-on effect that made it more urgent for regulators to take action about the slow-motion car crash in the stablecoin markets. A readout of the meeting convened in July by Yellen noted that potential risks posed by the growth in stablecoins include “risks to end-users, the financial system, and national security.”
“The Secretary underscored the need to act quickly to ensure there is an appropriate U.S. regulatory framework in place,” the Treasury Department also noted.
But when the President’s Working Group issued its report on November 1, it did not urge regulators to “act quickly.” The group recommendedAnother multiagency bureaucracy, the Financial Stability Oversight Council, conducted a study of stablecoin-related systemsic risk. The report also stated that stablecoin issues should be subject to deposit insurance requirements just like banks. However Congress was required by law to legislate the matter.
The working group also called on Congress to pass legislation to limit business partnerships between cryptocurrency companies that perform different functions. This would reduce the risk of conflicts of interests. (Tether was also under scrutiny for its mingling of its reserves with assets managed on Bitfinex, a cryptocurrency exchange. The report also said that Congress should pass legislation “to require any entity that performs activities that are critical to the functioning of the stablecoin arrangement to meet appropriate risk-management standards.”
The recommendations were welcomed by cryptocurrency trade associations, despite Congress being easily influenced by industry lobbyists.
“Prompt action from this Congress on anything is unlikely, let alone on something like stablecoins,” tweeted Jake Chervinsky, head of policy for the Blockchain Association trade group. Chervinsky’s colleague, Blockchain Association Executive Director Kristin Smith said: “Given that there is still a crypto information gap among some lawmakers and that the legislative process takes time, it is unlikely that anything will be signed into law anytime soon.” Meanwhile, Jerry Britto, the executive director of another trade association called Coin Center, reacted to the release of the report saying, “Bottom line: not a big deal from a crypto advocate’s perspective.”
The lobbying budget for the cryptocurrency industry this year has exceeded $2.8 million. according toThe Center for Responsive Politics. Many lawmakers already align ideologically with the laissez-faireThe industry has intensified its efforts to raise campaign money for its strongest advocates on Capitol Hill, a result of the ideology that characterizes cryptocurrency. Cryptocurrency players hosted a fundraiser for Sen. Ron Wyden (D-Oregon) after he unsuccessfully advocated for “the industry’s preferred fix” to tax reporting provisions in the infrastructure bill signed into law on November 15 by President Biden, according to The Washington Post.Sen. Kyrsten Silena (D-Arizona), raised $180,000 in the third quarter from the cryptocurrency sector after she modified an amendment that would have eased the same tax reporting provisions to make them more industry-friendly.
Though the President’s Working Group report largely relies on Congress to do something about stablecoins, it did, however, leave open the possibility of regulatory action by the SEC and the CFTC. According to AFR’s Marcellin, one of those agencies could act soon.
“The regulators are getting warm to the fact that there are existing authorities,” Marcellin said. “We see [SEC chair] Gensler making a lot of movement and we expect an announcement on that shortly, based on his public statements.”
She noted, however, that rules limiting a financial institution’s risky behavior come primarily from banking regulators, such as the FDIC, and that the President’s Working Group report appears to have foreclosed on that possibility at a crucial time.
“When we’ve had major legislation up before, the banking and tech industry have proven themselves to be very formidable in their lobbying efforts,” Marcellin said. “Putting this before Congress might not lead to good public policy right now.”