Yesterday, Christopher J Waller, a member of the Board of Governors of the Federal Reserve System, delivered remarks concerning regulation of the crypto-asset space. Governor Waller described a “regulatory perimeter” within which traditional finance operates. The “normal backstops and safety nets” that we see applied on traditional finance are not, at this moment, being applied to the market for crypto-assets.
Governor Waller shared data on the usage practices of crypto-asset holders. Anywhere from 12% to as high as 20% of American adults held crypto-assets during the past year. Approximately 90% of these adults held crypto-assets for investment purposes versus for use as a payments system.
Crypto-asset trade creates the opportunity for counter-party disputes and Governor Waller discussed briefly that in the aftermath of a market loss, disputes between intermediaries and traders over poor due diligence, poor financial advice, or poor management skills could arise.
The irony Governor Waller points out is that it is usually the intermediary i.e., a bank, that seeks out protection. This demand for protection on the part of the larger players in a financial market did not surprise me. Think agency co-option for the sake of putting the negative externalities of a loss on society at large. While Governor Waller did not cite the 2007-2008 Great Financial Crisis and the bank bailouts that ensued, I gathered from his remarks that the rest of American society wants regulations that both protect taxpayers from the socialization of losses while promoting confidence in the investment ecosystem’s safety.
I don’t see crypto-asset regulation as an issue that causes political realignment. President Biden’s executive order on crypto-assets, notwithstanding, Governor Waller’s remarks at a minimum seemed designed to stay on topic at the SNB-CIF Conference on Cryptoassets and Financial Innovation, while tangential with the “let’s have a discussion” tone of Mr Biden’s executive order.
When we hear public discussions about expanding regulations, more than likely there is a very rough written draft laying around somewhere. Anything at this point is speculation as to content, but traders should start their own discussions and analysis now. Nothing wrong with exploring the legislative, political, and legal scenarios.
4 June 2022
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