The U.S. Federal Reserve, along with other government entities and officials, is struggling to deal with the financial disruption brought on by cryptocurrency’s move into banking and other financial services, according to an article in the New York Times.
Without any mention of pro-crypto regulators and lawmakers, the article says officials are trying to figure out how to curb what they see as the potential dangers from an industry “whose short history has been marked as much by high-stakes speculation as by technological advances.”
The Times story notes efforts by the U.S. Securities and Exchange Commission (SEC) to staff up with experts to help it deal with the exploding industry. Observing that as it could take at least a year to write rules or get Congress to act, regulators could issue guidance in the interim.
The article notes the recent $600 million hack of PolyNetwork and singles out crypto lender BlockFi, noting that company’s explosive growth and recent legal troubles, as well as decentralized finance (DeFi) platform Compound, which the article says “operates completely outside the regulatory system.”
The article compares BlockFi’s offers of up to 8% annual interest rates on cryptocurrency deposits with U.S. banks’ average rate 0.06% for savings deposits but makes no mention of the macro factors behind the latter, such as the Fed’s unprecedented monetary expansion policy.
“Crypto is the new shadow bank,” the article quotes U.S. Sen. Elizabeth Warren (D-Mass.), a vocal crypto critic as saying. “It provides many of the same services, but without the consumer protections or financial stability that back up the traditional system.”
The article notes that regulators are concerned about the adequacy of the cash reserves and algorithms that back stablecoins, in which many DeFi loans and deposits are denominated. Warren floated the idea of banning U.S. banks from holding the cash deposits that back many stablecoins.
The article also posits that central bank digital currencies (CBDCs) could make cryptocurrencies redundant, quoting Fed Chairman Jerome Powell’s recent statement that a U.S. CBDC ”could undermine the entire crypto ecosystem.”
The article states that many traditional financial institutions are nervous about potential disruption at the hands of DeFi but makes no mention that many are themselves starting to provide crypto services or that a number of crypto companies. Wyoming-based Avanti and Kraken are themselves seeking the legitimacy of being a regulated bank.
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