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The total value of all cryptocurrency transactions in 2021 was $16 trillion.
The Biden administration is trying to get ahead of the issue of how to regulate the burgeoning and ramifying world of cyber currencies (which we need … why?). And the schisms inside the administration are not helping.
As I reported last week, the Treasury in the person of Undersecretary Nellie Liang is basically on the gee-whiz side of the debate: Innovation is wonderful (as well as profitable).
Liang and her boss, Treasury Secretary Janet Yellen, as I reported, have also been under fire for not utilizing the Financial Stability Oversight Council and for keeping in place Dino Falaschetti, Trump’s far-right appointee who heads the vital Office of Financial Research. (Maybe my story did some good. On Friday, Treasury put out a release announcing that Falaschetti had abruptly “resigned.”)
At last Tuesday’s hearing of the Senate Banking Committee on stablecoins, with Liang as the sole witness, committee chair Sherrod Brown made no bones about how he views stablecoins. Their main purpose, he warned,
is to make it easier to trade, speculate, and in some cases even hide assets in crypto and digital markets. In just a few years, stablecoins have mushroomed into a $175 billion market … The companies claim that a stablecoin is backed by real dollars, invested in a reserve account—that’s what makes it “stable.” But our regulators tested that claim by a giant stablecoin issuer. That issuer ended up paying nearly $60 million in fines because it lied about its reserves. It turns out that for over two years, the stablecoin was only really “backed” 28 percent of the time.
Stablecoin companies say that you can, quote, “redeem” a stablecoin whenever you want, exchanging it back into dollars from the stablecoin’s reserve. But the fine print in the agreements of some of the biggest companies says that ordinary consumers can’t actually redeem their stablecoins for dollars from the company that issues them. Only institutions like hedge funds can. And even then, many stablecoin issuers can delay redemptions, or refuse them entirely.
Liang echoed the recommendation of the president’s working group on stablecoins that they should be issued only by federally insured banks. But stablecoins are only as good as the collateral backing them.
If they are issued privately, some public agency has to attest to the value of that collateral. And if they are issued by federally insured banks, then the FDIC is tacitly guaranteeing them and has one more job to do. Either way, nobody has adequately explained what’s wrong with U.S. dollars and why we need a second, shadow currency.
Liang and the Fed are at odds with regulatory agencies such as the SEC and the CFTC over whether to regulate crypto under existing law as securities or commodities. These agencies are far less sanguine about their net benefits.
Meanwhile, the administration has just announced a new unit of the FBI dedicated to tracking and seizing illicit uses or thefts of cryptocurrencies. Obviously, if cryptocurrencies were the pure, peer-to-peer vehicles that libertarian enthusiasts claim, there would be no hacking, no thefts, no illicit uses, and no need for new law enforcement resources. Cryptocurrency crime that was identified by authorities totaled $14 billion in 2021, a tiny fraction of the total value of all crypto transactions at a staggering $16 trillion, but still a great deal of money.
The White House is also planning an executive order to have a government-wide policy on crypto. This effort was initiated by the National Security Council, out of concerns such as money laundering for terrorism.
Weirdly, the one person at the White House who really understands both the technical and financial aspects of crypto, technology and competition policy coordinator Tim Wu, has had to recuse himself from the process. Why? Because Wu owns some cryptocurrency and that’s seen as a conflict of interest.
And it surely is. I am a huge admirer of Wu, who has been one of the pioneering figures in calling for better regulation in the fields of communications and economic concentration. I was thrilled when it was announced that he was joining the administration.
After I confirmed the report of Wu’s recusal, I sent an email asking why he didn’t just sell his holdings so that he could do his job. I got no response.
If one of Biden’s very best and most public-minded regulatory officials has been seduced by the allure of crypto riches, then the White House can’t do its job and the problem is even larger than it seems.
