Federal regulators and members of Congress have expressed the need for bright lines for cryptocurrency regulation, but almost a year after the collapse of FTX appear no closer to articulating what those bright lines may be. In the absence of federal rules, states could step into the void with a more permissive structure.
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I'm going to voice an unpopular opinion: I don't really like Halloween. My dislike has nothing to do with mischievous teenagers or children hopped up on pixie sticks, though: I just don't seem to be capable of getting my act together far enough in advance to ever have a good costume. So year after year, I wake up on Halloween morning and dig in my closet to find some ultra-low-effort costume I can slap together. Today, for example, I found a red flannel shirt, and with the aid of a roll of paper towels I intend to hit the town as the Brawny man. It's lame, I'm lame, and that's why I don't love Halloween.
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But one thing I kind of like about Halloween is that there's a streak of topicality in the costumes of those who put more than 10 seconds of thought into it. Last year, there were a lot of Stranger Things costumes to coincide with the series' much-anticipated fourth season; back in 2012 when the Marvel cinematic universe was in full swing you saw a lot of Iron Men and Black Widows (apparently). Halloween, at least for crafty grownups, can be a kind of pop culture roundup that I very much wish I had the foresight to participate in.
So, I was looking for what the hot costumes this year are likely to be, and besides all the Barbies and Taylor Swifts and references to TV shows I haven't seen, I was surprised not to see Sam Bankman-Fried on the list. For the lazy among us, all you would really need is some cargo shorts and a wig to pull it off — but maybe the problem is that it's already kind of dated.
FTX, the cryptocurrency exchange that Bankman-Fried founded, imploded almost exactly a year ago, bringing about a secular decline in crypto prices and arguably contributing to a liquidity crunch within and outside of the crypto sphere that sank three midsized banks a few months later. But after some initial high hopes for action by Congress and/or regulators — hopes I myself dared to dream — it kind of seems like nothing happened and nothing is going to happen. Instead, it seems like AI has taken over as the new technology that frightens policymakers. To my mind, leaving crypto in a regulatory gray zone seems like a mistake.
Policy is kind of like jazz: It's about the policies that you don't make as much as the ones you do. Crypto poses a unique challenge for people whose jobs are to draw bright lines for banks to follow. Blockchain ostensibly has practical applications for anything from medical records to payments, but it also has nefarious applications ranging from financing terrorism to tax evasion — which is to say nothing of the exceptional volatility that the sector has endured since its inception. But the most concrete guidance offered by banking regulators has been something of a Just Say No policy for banks, emphasizing the dangers of crypto, but stopping short of an outright ban (except, it seems, for some).
In the absence of a formal articulated policy, states are attempting to jump in to fill the void. Wyoming, in particular, has pioneered an aggressive effort to court the cryptosphere by creating a state banking charter specifically targeted to serving the crypto industry in hopes of being to crypto what South Dakota has become for credit cards or what Delaware is for incorporation — a haven protected by highly favorable state laws.
I see no inherent reason why Wyoming or any other state shouldn't be the crypto capital of the United States. What concerns me is that, in the absence of any articulated regulatory floor on crypto, the thing that states have to offer those businesses is an ever-lighter regulatory touch. And as we've seen, that approach can have serious implications for the broader financial system, which goes a long way toward explaining why the Federal Reserve has gone to such lengths to prevent one such purpose-built bank from becoming a member.
Policymakers may have decided that they can afford to bide their time in articulating a policy toward this nascent technology — one that may, or may not, be the future of something. They could be right. But while crypto may not be the hot, fresh Halloween costume this year, it's not going away — and the longer regulators wait, the more likely it becomes that states articulate the rules of the road.
John Heltman is the Washington Bureau Chief for American Banker, leading coverage of federal bank regulators, monetary policy and Capitol Hill. John,... Read full bio
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