From a financial stability point of view, a changing of the guard is welcome. Crypto exchanges are bursting through a hole left unsealed by Satoshi Nakamoto. In his 2008 white paper, the pseudonymous founder of the Bitcoin network suggested no obvious way for people to exchange their dollars and euros for decentralized currencies. Digital asset exchanges, which enabled people to do that and more, turned into shadow banks, offering traders up to 125 times more leverage on their investment, all the while sparsely regulated.
If liquidity and solvency crises in the crypto industry have not yet threatened mainstream finance, it is only because of their limited links. However, it’s only a matter of time before the two become more closely intertwined. Some of that mixing may very well be happening outside the US. While the SEC was tightening the screws, a Hong Kong legislator took to Twitter to invite virtual asset operators to the city, which went ahead with a new regulatory regime on June 1. support.
But in the end, Washington thinking will prevail, as no reputable financial center wants to risk its stability for the sake of extra business. And the regulatory mood in the US is pretty clear. While Ripple Labs Inc. and its top executives were accused by the SEC in late 2020 of selling XRP tokens without registering them, it was Sam Bankman-Fried’s FTX, the most spectacular of last year’s crypto debacles, that made a major appearance inevitable . It arrived this month when the SEC’s Binance Holdings Ltd. and Coinbase Global Inc. sued.
Following the lawsuits, banks are withdrawing support from Binance’s US site, whose customers can no longer withdraw or withdraw dollars. Binance.US, which has described the SEC’s civil action as unwarranted and vowed to fight it, will transition to a crypto-only exchange.
Meanwhile, Coinbase, which has denied allegations from the SEC that it has acted as an exchange, broker-dealer, and clearinghouse — all without registering for any of those roles with the agency — is under pressure from state regulators demanding that the largest U.S. crypto exchange stops staking program. Staking is a service that channels capital for decentralized finance or DeFi projects, by giving investors passive income for locking in their crypto assets through self-executing software known as smart contracts.
The overall message from the authorities is this: Investors must be gradually driven out of the unregulated corners of the cryptocurrency world without depriving them of the efficiency of decentralized ledgers, smart contracts, or any other vaunted innovation. Let the average private customer of a bank put part of its deposits on the blockchain. As long as a well-regulated depository channel channels those savings, there is no need to worry about additional systemic risks. Returns for investors will not come from excessive leverage, but from fractionation. Investment opportunities usually reserved for wealthy private banking clients will become available to mass market clients.
This fits in well with the Bank for International Settlements’ vision of a unified ledger. Central bank digital currencies will be placed in one part of the ledger, while bank deposit coins will be placed in another part. Behind another partition are all the real assets one could buy – stocks, bonds, apartments, toll roads – in symbolic forms. The whole thing becomes analogous to a smartphone, with all applications using the same programming environment. Just as a photo taken by the phone’s camera has no problem being read by a social media app, money would move seamlessly between compartments of the unified ledger and end up in all sorts of utilities devised by the private sector .
Mainstream finance, overseen by national monetary authorities, has long viewed the crypto industry as fundamentally unstable and socially useless. Unregulated exchanges, stablecoins similar to money market funds, and speculative altcoins (things other than Bitcoin and Ether) have undoubtedly pioneered many blockchain applications. In the future, licensed financial institutions such as JPMorgan Chase & Co. might as well take control of the technology. After all, tokenized customer deposits offer all the functionalities of programmable money. So why not promote them in smart contracts, as an alternative to stablecoins like the USDC from Circle Internet Financial Ltd.?
Authorities can sometimes lose control of depositories, as we have seen this year with the many bank failures in the US. Still, the risks are largely known, which is not the case with digital assets. With U.S. regulators determined to check crypto’s rampant growth, Wall Street may move in with tokenized versions of its own traditional products — starting with the humble bank deposit.
More from Bloomberg Opinion:
• Maybe Coinbase should never have gone public: Lionel Laurent
• Matt Levine’s Money Matters: When is a Token Not a Security?
• Could Coinbase and Binance Ever Be Legal Exchanges?: Editors
This column does not necessarily reflect the views of the editors or Bloomberg LP and its owners.
Andy Mukherjee is a Bloomberg Opinion columnist on industrial companies and financial services in Asia. He previously worked for Reuters, the Straits Times and Bloomberg News.
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