Photo illustration by Chesnot / Getty Images
Today’s announcement that the crypto derivatives exchange FTX has launched the largest private equity round in the history of the industry is yet another sign of the euphoria and exuberance surrounding crypto. That April, cryptocurrency markets hit $ 2 trillion for the first time, which is more than double what it was in early 2021. These last few months have strongly reminded me of the late 1990s when I saw investors frenetically piling millions of dollars into Russian state coffers (GKOs) and into every company with the word ‘Internet’. The Russian crisis of 1998 and the technical meltdown should have taught lawmakers, regulators and investors a lot, at least that when the music stops, a lot of people will land on the ground because there are never enough chairs for everyone. too good to be true ”markets.
The market capitalization of cryptocurrencies has increased dramatically, June 2020 – July 2021
It’s only July 2021, and there have already been eight major rounds of fundraising from crypto and blockchain companies; these companies represent over 50% of the top 12 fundraising rounds in this sector that have taken place since 2018. It would be very easy to ignore these fundraising rounds by saying that they are private equity and venture capital firms investing in crypto companies. However, given the investments by pension funds, insurance companies, investment firms and banks in private equity firms and venture capital firms, I would urge regulators and rating agencies to pay much more attention to these investments.
It is also noteworthy that at least sixteen fund managers have doubled their investments in crypto assets. Typically, banks, insurance companies, investment firms, and pension funds invest in all types of mutual funds. A recent trend among cryptocurrency investors is similar to repo deals, where cryptocurrency owners lend their assets to get higher interest rates. In addition to crypto volatility, these investors are also exposed to scams. A recent annual economic report by the Bank for International Settlements described how an incredibly accommodating monetary policy environment is affecting the current significant risk appetite “across all asset classes, including real estate, commodities and cryptocurrencies. Retail investors played a disproportionate role – a typical sign of exaggerated valuations. “The BIS report also notes that” it is now clear that cryptocurrencies are speculative assets rather than money and are in many cases used to launch money laundering, ransomware attacks and to facilitate other financial crime. Bitcoin in particular has few redeeming properties of public interest when one takes into account its wasteful energy footprint. “
Yesterday’s meeting of the President’s Working Group on Financial Markets to discuss stablecoins, a rapidly growing cryptocurrency, is a very positive development. The group consists of the US Treasury Department, the Federal Reserve, the Securities Exchange Commission, the Commodities Futures Trading Commission, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation. These regulators regulate various financial institutions, non-financial corporations, and financial instruments. However, since investing in and trading in stablecoins and other cryptocurrencies impacts all types of financial institutions such as banks, private equity firms, asset managers and private investors, the cooperation and coordination of these regulators is urgent and crucial. For the next meeting, I would include the New York Department of Finance in this group, since Wall Street is in New York.
Stablecoins: Potential Development of Regulation
Financial Stability Board, Note: AE = Advanced Economies EMDE = Emerging Markets Developing Economies
According to the BIS, “stablecoins are trying to import credibility by being backed by real currencies. As such, these are only as good as the governance behind the promise of support. They also have the potential to fragment the liquidity of the monetary system and undermine the role of money as a coordination tool. In any case, if the supposed support is conventional money, stablecoins are ultimately only an appendage to the conventional monetary system and not a game changer. “
Stablecoins aspects of current regulation, survey of FSB members
Board of Directors for Financial Stability
Congress and US regulators must work together to develop a regulatory framework for the cryptocurrency industry. It is very important that the President’s Working Group on Financial Markets take a close look at all types of cryptocurrencies, not just stablecoins. The interdependencies of crypto investing and trading with the overall financial system should not be ignored. In addition, I have no doubt that the regulation of stablecoins and other cryptocurrencies will require collaboration between foreign financial regulators and international standard-setters such as the Basel Committee on Banking Supervision, the Financial Stability Board and the International Organization of Securities Commissions.