Alt-Coin-Delete: Wall Street Welcomes a Cryptocurrency Crackdown

A change is welcome for financial stability. Crypto exchanges are bursting through a hole left unsealed by Satoshi Nakamoto. In his 2008 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 the limited links. However, it’s only a matter of time before the two become more closely intertwined. Some of that may very well happen outside the US. While the SEC was tightening its screws, a Hong Kong legislator invited virtual asset traders to the city, which was given a new regulatory regime on June 1. The crypto hub’s ambitions have the silent backing of Beijing.

Ultimately, 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 clear. While Ripple Labs 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 busts, that brought a heavy-handed action inevitable. It arrived this month as the SEC sued Binance and Coinbase.

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, will move to a crypto-only exchange. Meanwhile, Coinbase, which has denied allegations from the SEC that it has been acting as an exchange, broker-dealer, and clearing house (without registering for any of those roles), is under pressure from state regulators demanding that this crypto exchange abandon its eviction program. discontinuation. 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 driven out of unregulated corners of the crypto 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 risk. Returns for investors will not come from excessive leverage, but from fractionation. Investment opportunities usually reserved for high net worth 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 can buy – stocks, bonds, apartments – in tokenized forms. The whole thing will be analogous to a smartphone, with all apps using the same base. Just as a photo taken by the camera has no problem being read by a social media app, money would move seamlessly between compartments of the unified ledger.

Mainstream finance has long viewed the crypto industry as unstable and socially useless. Unregulated exchanges, stablecoins similar to money market funds, and speculative altcoins (things other than Bitcoin and Ether) have been pioneers in many blockchain applications. In the future, licensed financial institutions like JPMorgan Chase 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?

Authorities can sometimes lose control of depositories, as we have seen this year with bank failures in the US. Still, the risks are largely known, unlike with digital assets. With US regulators determined to check crypto’s growth, Wall Street can come in with tokenized versions of its own traditional products, starting with the humble bank deposit. ©bloomberg

Andy Mukherjee is a Bloomberg Opinion columnist on industrial companies and financial services in Asia.