This Week in Policy (5/26)

This Week in Policy (5/26)

Hallo fintech-entoesiaste… Can you guess the language?

It is an honor to be named the new Editor in Chief for the Policy section of This Week in Fintech, especially given the great contributions of my predecessor Ben White. So, yes, you guessed it…I have some big shoes to fill!

Let’s dive in!

We are starting to see some legal ramifications of the Great Crypto Meltdown (we will use this term to talk about what happened two weeks ago). Last week, the customers of Stablegains, a crypto lending company that promised its customers 15% APY, were shocked to learn that the company lost over $44 million of their funds. Stablegains’ value proposition, as its name suggests, was that it would invest its customers’ funds in stablecoins as a more “stable” alternative than “volatile cryptocurrencies,” such as Bitcoin and Ether. It turns out, as we are all learning the hard way, that not all stablecoins are stable. Despite Stablegains’ undertaking to invest in USDC, it ended up investing all its customers’ funds in the “algorithmically stable” UST-Luna. When the meltdown happened, customers who wanted to withdraw funds in UST-Luna and sell them for USD were able to only get 20% of their deposits’ USD value. A class-action firm notified Stablegains that a lawsuit is forthcoming, but it is far from clear how much depositors would be able to recover. Incidents like these not only feed into the traditional crypto-induced consumer-protection concerns but also support the skeptics’ arguments that the industry poses financial stability risks that warrant a strict regulatory response.

In your opinion, what made Stablegains so optimistic about the continuation of the high APY on UST? Also, can you think of various ways to quantify the losses resulting from the Great Crypto Meltdown?

On the Hill, the Senate Judiciary Committee held a hearing titled “Excessive Swipe Fees and Barriers to Competition in the Credit and Debit Card Systems.” The hearing focused on how rising interchange fees and other supposedly anticompetitive practices by credit and debit card issuers, such as Visa and Mastercard, lead to higher prices of consumer goods and contribute to inflationary pressures in the economy.

Can digital currencies put an end to interchange fees?

Last week also on the Hill, SEC Chair Gary Gensler told lawmakers on the House Appropriation Committee that the SEC has “jurisdiction over probably a vast number” of cryptocurrencies, but “maybe” not on the most famous of all, Bitcoin. The reason is that Bitcoin is more like a “commodity token” that arguably should be regulated by the CFTC. Why is Gensler’s uncertainty?? Well, the test for a “security,” which grants the SEC jurisdiction, comes from the 1946 Howey case, which defined a security as “a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party." Bitcoin does not meet the requirements of this test, mainly because there is no “one party sitting there behind it and the public's not anticipating [returns] based on the efforts of that one party,” as Gensler noted. Absent a clear answer, the saga continues over which agency should have regulatory power over digital currencies.

What are some of the drivers of regulatory ambiguity in this regard, and how does it manifest itself?

Back to the ramifications of the Great Crypto Meltdown, although this time in Davos where #WEF22 is being held. The leaders of global financial institutions came down harshly on cryptocurrencies. International Monetary Fund Managing Director Kristalina Georgieva called cryptocurrencies that are not backed by any assets “a pyramid [scheme] in the digital age.” In the same vein, European Central Bank President Christine Lagarde stated in an episode of Radio Davos that “cryptocurrencies are not currencies at all.” To make the regulatory puzzle even more complicated, Lagarde insisted that crypto currencies should be regulated as assets rather than currencies. On the opposite end came the intervention of U.S. Senator Pat Toomey (R-PA) on a panel that included Nasdaq CEO Adena Friedman, PayPal CEO Dan Schulman, and economist Jason Furman. Referring to a bill he proposed to regulate stablecoins, Toomey asserted that stablecoins should not only thrive but also undertake all the functions of a future digital dollar.

In your view, what could explain such a huge gulf in the opinions of policymakers on cryptocurrencies?

I welcome all your thoughts and opinions in the comments section.

See you next week!