In the stock market plunge, cryptocurrency has lost far more value than the market as a whole, confirming the view that it was mostly a Ponzi scheme all along, enriching the early movers and failing to unravel. Not to mention the lack of transparency and the environmental costs of crypto “mining”, which uses huge amounts of electricity.
The mother of all cryptos, Bitcoin, lost more than 56 percent of its value in the second quarter. Despite the techno-whizbang and the hype of easy payment, crypto was created to solve a non-problem, except for fraudsters and others with an illegal need to launder money.
Now, just as the entire sector is collapsing under its own weight, here comes the Treasury and the Fed to save it, perhaps with the House Financial Services Committee. The Treasury, and to some extent the Fed, are both played by Nellie Liang, who is the Secretary of State for Domestic Finance.
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Liang spent most of his career at the Fed. She is an enthusiast for economic “innovation” and relatively lenient regulation, as well as a champion of grassroots consciousness. She has had considerable influence on Janet Yellen, formerly of the Fed, now Treasury Secretary.
Liang chairs a presidential task force on the regulation of stablecoins, a form of crypto that is supposedly guaranteed to hold its value because it is backed by more traditional forms of actual money (which is why we need stablecoins) Why?). For the most part, stablecoins have been used for transactions in other forms of crypto.
Liang’s vision, expressed in testimony and briefings, is that stablecoins can have wider use in mainstream payments, and have lower costs than, say, credit card payments or Venmo. So far they haven’t been used much if at all for that purpose. Liang also supports the idea of non-banks issuing stablecoins as long as they are fully backed by other short-term securities.
Financial press reports and leaks say the House Financial Services Committee is on the verge of writing a bipartisan bill that follows Liang’s model.
This political question combines a philosophical and regulatory argument with a battle for turf. According to my sources, the agencies that favor tougher regulation, such as the SEC, CFTC, and FDIC, are wary of the whole approach, as the government supports the kind of innovation that invites trouble. One person who hasn’t weighed in is Yellen, leading critics to wonder if there really is a unified fiscal position.
Liang’s view is that the Fed is best placed to regulate this, both for banks and non-banks, because it is responsible for “prudential regulation” – capital standards, leverage ratios and the like. The SEC’s view has been that if it quacks like a security, then it’s a security and the SEC should regulate it.
My view, for what it’s worth—and I was once the chief investigator on the Senate Banking Committee—is that the entire crypto sector is a shambles, and the last thing it needs is a government certification that the wise will just bypass. If the latest collapse proves anything, it’s that the financial sector needs simplification, not further complications understood only by insiders.
