The US is a fun country. We have so many financial regulators that sometimes end up without proper financial regulation. Cryptocurrencies represent the last example.
Trading in bitcoin and its brethren has grown too big to be ignored – yet that’s what happened. There are no official public data on prices, volume or volatility. No single authority regulates crypto exchanges. No one can be certain investors who are properly protected.
Even people in the libertarian crypto world wonder when the federal government will intervene. Mike Novogratz, a fund manager who helped lead the charge in the asset class, told CNBC there would be “Relief” in the market once the rules of the road were established and he suggested to Congress to give the job to Gary Gensler, head of the Securities and Exchange Commission.
“When Gary finally finishes, he’ll be fine,” Novogratz said of his fellow student Goldman Sachs. “He would like to regulate the whole crypt. He doesn’t have the mandate.”
All this amounts to a particularly American regulatory failure. Waiting Gensler to get his hands on the whole crypt has become the Wall Street equivalent of waiting for Godot.
The underlying difficulty is that US financial regulation is fragmented. There are several banking and federal market authorities, with overlapping jurisdictions, plus state regulatory systems. As Jamie Dimon, the head of JPMorgan Chase, put it in his annual letter to the shareholder: “There is no one real authority who can coordinate all moving parts and bridge differences.”
In the long run, this is not just a bad thing. Checks and budgets are as American as apple pie or sweeping bonds; having so many regulators serves to protect against one of those who set out.
But this system has its weaknesses. New products that are neither fish nor birds in a regulatory sense can fall through the cracks. Crypto is difficult to regulate because it is difficult to define. While true believers call cryptocurrencies, U.S. regulators see them differently. Bitcoin, for example, has been considered a commodity. Other cryptos are seen as titles.
This resulting confusion helps explain why neither the SEC nor the Commodity Futures Trading Commission directly regulates crypto exchanges like Coinbase. No one gave him the job – a source of frustration for regulators.
Congress, in its own way, is on the case. Elizabeth Warren, the Democratic senator, he wrote to Gensler this month to question whether the SEC “has the appropriate authority to close existing gaps in regulation that leave investors and consumers vulnerable to the dangers in this highly opaque and volatile market.”
Gensler’s response, scheduled for July 28, will no doubt be persuasive. But whether it will challenge lawmakers to act quickly is another matter. If history is a guide, Congress will wait for things to work out before deciding how they should be put together in the first place.
The resulting impasse exacerbates the anxiety that regulators are further behind the curve. Crypto mania reminds many Wall Street veterans of the unregulated rise of credit default swaps in the years leading up to the financial crisis. Like the crypt, CDSs were difficult to characterize, being a form of insurance that was not regulated as such, and were seen by their lawyers as too cool to be overseen by simple bureaucrats.
“It took a crisis to focus our attention on products like CDS,” said Sarah Hammer, general manager of the Stevens Center for Innovation in Finance at the Wharton School of the University of Pennsylvania. “In some ways, cryptography is more challenging than derivatives because it falls into several different regulatory rounds.”
The irony for participants in the crypto markets is that they could be better off if a cop like Gensler was already in rhythm. The various parties could get to know each other and come to some sort of accommodation. It could also be a relief, as Novogratz said.
Now, the best way for regulators to gain a foothold in the crypto markets may be to get out swinging, using their general application powers to set things right. The SEC has already brought in dozens of cryptocurrencies. Dan Berkovitz, CFTC commissioner, recently did it raised doubts on the legality of any derivative deals found on decentralized finance, or “defi”, programs that use blockchain technology to cut down on intermediaries.
It could become very interesting. I find myself reminded of this moment in the film Everything to Eve when Bette Davis addresses her guests and presents her forecast for the evening to come. “Tighten your seat belts,” he tells them, “it will be a disastrous night.”