Cryptocurrencies have been the speculative rage in recent years. Millions of people, including a lot of unsophisticated investors, purchased tens of billions of dollars of crypto hoping to get rich quick. Quite the opposite occurred recently, with the implosion of the multibillion-dollar cryptocurrency exchange FTX, and the money invested "vanished."
The founder of FTX, Sam Bankman-Fried, a bushy-haired kid literally living like a king in the Bahamas, was finally arrested a few days ago and is likely to spend a very long time in prison. "Investors," many of them young and gullible, learned the hard way that the regulatory protections put around our banking system over the past century are essential to protect our population, our national security and our economic well-being.
When will our politicians — who collected enormous amounts of campaign donations from Bankman-Fried and appeared with him in publicity photos — ever learn? If something seems too good to be true, it almost certainly is.
Let's go back in time to recall the history of our monetary system and the reasons behind the tight laws and regulations wrapped around it. For centuries, the world's trade was based on a system of barter. We used gold, silver, horses, jewelry and other items to "pay" for clothing, food and other things we desired. The barter system was highly inefficient in an industrial economy and was replaced in the 1800s by a private monetary system of paper and coins issued by banks and usually backed by silver or gold.
In the U.S., the money-based system was more efficient than bartering, but it kept breaking down, causing financial panics and depressions, so we created the Federal Reserve System in 1913 to have exclusive control over the creation of money. The introduction of the Fed helped stabilize the U.S. money supply, but it was not sufficient, as we learned beginning in 1929, when people lost faith in the banking system and panicked.
This resulted in massive bank failures with many people losing their life savings, resulting in the Great Depression. This in turn led to the creation in 1934 of the Federal Deposit Insurance Corp., to insure bank deposits, thereby restoring confidence in our nation's banks.
A lot of the Depression-era regulations, such as controls on deposit interest rates, needed to be removed due to massive inflation caused by excessive government spending and lax monetary policies during the 1960s and 1970s. This led to a much faster-paced and more competitive financial system and the need for a more robust and faster-paced supervisory system, which we are still trying to get right.
We hear a lot about "fintech" these days. Don't be confused by the fancy term. Remember, fintech firms are not banks, although banks use massive amounts of financial technology. Banks are required to have FDIC insurance, but nonbank fintech firms cannot have FDIC insurance and they are not members of the Federal Reserve System.
Finally, there is the issue of the encryption of currency, which many of us mistakenly believe is a great new concept. Money has long been encrypted by the Federal Reserve and by commercial banks when it is transferred to other banks. These money transfers are very fast and confidential. New technologies have been developed to further speed that transfer process and improve its security. These new technologies can be developed by banks but are frequently developed by nonbank technology firms.
The development of new technologies can be a very good thing if safeguards are in place. One of the most important safeguards is to make sure the transfers are visible to bank regulators charged with protecting against criminal activity — including terrorism, tax evasion, and extortion — and providing protections to consumers against fraud and illegal discrimination.
If encrypted transfers are made without the ability to monitor them, they will not serve the public interest, no matter how efficient they might be. The government will not and should not allow these public policy protections to be evaded through anonymous money transfers — whatever we call them.
As we have recently learned yet again, backroom deals with dubious or unscrupulous operators will buy us nothing but serious economic trouble and will result in considerable harm to tens of millions of lower-income Americans who can least afford the losses. I'm confident that we will resolve these public policy issues if we encourage open dialogue and debate and allow the regulatory and legislative processes to take place in proper public forums, not behind closed doors.
The Federal Reserve, U.S. banking agencies and large commercial banks are currently working on technological solutions along the lines of blockchain within the framework of existing regulatory requirements and central bank controls. We need to trust that process and the safeguards around it.
The financial system has been evolving for hundreds of years with the pace of change occurring breathtakingly fast over the past 50 years. We must be thoughtful and deliberate as we move into the future. Our national security and the well-being of our citizens depend on it.
