Eyeing Crypto

U.S. regulators are playing catch-up with crypto. The phrase appeared a number of times in this week’s media reporting sparked by concerns over the lending of digital assets by cryptocurrency exchanges and decentralized finance (DeFi) applications.

The Sept. 11 Quartz newsletter, gives the most succinct overview and background of U.S. crypto regulation I found. Senior reporter John Detrixhe, who describes himself as obsessed with payments, put one long week’s worth of crypto news into one short paragraph:

In the US, the Securities and Exchange Commission (SEC) has put DeFi, or decentralized finance, in its sights, and is threatening to sue Coinbase, the country’s largest crypto exchange. Further south, the International Monetary Fund (IMF) warned that El Salvador’s let’s-make-bitcoin-legal-tender experiment could damage economic stability. Meanwhile, a top official at the Bank for International Settlements says central banks have to speed up their own work on digital currencies, because crypto alternatives are sprinting ahead. (It’s a membership article, but you can get a seven-day trial.)

The SEC-Coinbase exchanges produced a lot of coverage, as you can see from just this list of the week’s Bloomberg crypto articles.

I see much of this as crypto political jockeying in order to grab regulatory territory. Is lending really the hallmark of a security? I don’t think the banking regulators would agree.

Bloomberg columnist Matt Levine stated lending-is-not-a-security argument as only he can: “So you could reasonably look around and be like ‘Oh sure we can pool people’s Bitcoins and lend them and pass along the interest, that’s not a security that should involve the SEC.’ You’d be wrong, but I get where you’re coming from.”

The New York Times summarized its article on crypto’s rise in banking with the apt tag: “The boom in companies offering cryptocurrency loans and high-yield deposit accounts is disrupting the banking industry and leaving regulators scrambling to catch up.”

Regulatory clarity is sorely needed and quickly. I doubt that anyone who sees cryptofinance as a permanent fixture of the mainstream economy should disagree, though the crypto-cultists covered in the Financial Times this weekend do.

And lest we leave out the Office of the Comptroller of the Currency, American Banker covered the perspective of acting OCC Michael Hsu. “This is now consumer-facing,” Hsu said. . . . “We’ve got regular people who are in this product, who see hope in this product, and this space is not regulated.”

Even so, I believe that too much regulation can stifle innovation. That’s one of my main concerns with comments on consumer regulation. Sen. Elizabeth Warren, for instance, refers to DeFi as the new shadow banking system – Quartz used the less charged phrase “parallel financial system” – in her call for more consumer regulation.

I assume that she would consider that the purview of the U.S. Consumer Financial Protection Bureau. I don’t see this as a major consumer problem yet, especially given how difficult it can be to set up DeFi systems. Clarity in regulation for institutions, yes, but a rush into consumer protection, not so fast.

– Collin Canright