Bitcoin bingo and the erosion of financial stability 

Last week, Bitcoin broke the $52,000 mark, underscoring a double standard in the U.S. financial system. 

A gaggle of federal financial regulators largely known by their abbreviations (the FRB, FDIC, OCC, NCUA, SEC, FHFA, CFTC, CFPB and FSOC) and an array of regulators in each of the 50 states expend precious resources competing with one another to regulate every aspect and movement by banks. However, financial companies that are not banks but engage in bank-like activities — and make up most of the financial services market — are barely regulated when it comes to their financial health and strength. 

Bitcoin is a glaring example of the financial threats that can be nurtured by asymmetrical regulation. It doubles as an investment and as money, though neither is backed by anything of credible value, offering consumers computer code generated by an algorithm invented by someone we can’t even find. It is charmingly decentralized, controlled by a group of five people who have the keys to the software, and gleefully devoid of government intervention. That last characteristic has made it the facilitator of choice for online criminals, terrorists, hackers and traffickers.  

Instead of moving toward symmetrical regulation of financial risks, we seem to be moving further away from it. The approval of spot crypto ETFs by the SEC legitimized floating rate cryptocurrencies, supercharging Bitcoin’s market value to exceed $1 trillion and making it the anchor tenant in what has become a $10 trillion crypto superstructure. Surely, something that size should be considered a potential threat to financial stability?  

For comparative purposes, the U.S. mortgage industry, ground zero for the 2008 global crisis, has about $12 trillion in outstanding home loans. U.S. banks have deposits of around $17.4 trillion, and share accounts in U.S. credit unions are less than $2 trillion. But unlike cryptocurrencies and other non-banks, they are subject to more than 12,000 pages of federal rules and hundreds of federal and state regulators who scrutinize, question, second-guess and impact almost every aspect of their businesses.  

The current system of financial regulation in the United States was developed nearly a century ago. We can appoint and hire all the brilliant regulators we want, but when our laws are outdated, our systems obsolete, and regulatory tools prehistoric, catastrophic financial disasters are going to happen. The events of 2008 and the follies of FTX and Binance might never have occurred if we had developed a more effective system of oversight.  

On behalf of the users of financial services, here is one recipe to attain more certain financial stability. 

First, we need to bring uniformity and efficiency into the system by consolidating the regulatory roles of the agencies into one single financial services commission that oversees and monitors the financial strength and safety of any company — bank or not — that offers a broadly-defined suite of financial services. It should be endowed as if it were Amazon or Meta, with state-of-the-art technological resources and AI tools to allow it to anticipate events rather than simply reacting to them. It goes without saying that the regulatory role of the states must also be completely rethought, given their lack of resources to deal with today’s online economy (which makes state borders largely irrelevant). 

Second, much like the new Cyber Safety Review Board established in May 2021, which includes private-sector experts in post-mortem reviews of cyber disasters, there must be a regulatory role for private companies in financial regulation. They have too much power (and too many resources that the government doesn’t) to leave them sitting on the sidelines, focusing only on why the government always comes up short.  

Third, a new concept of federal deposit insurance must be developed that can better prevent debilitating runs like the one that brought down SVB. With the instantaneous transmissions of information (true or fake) on social media and only about 55 percent of deposits insured by the FDIC, keeping financial institutions liquid in a financial crisis has become nearly impossible.  

When it comes to maintaining financial stability, we know that Congress and the Treasury will effectively provide deposit insurance to non-bank deposits, as it did with money market mutual funds in 2008 and 2020. It would not be surprising to see the same thing occur in a future disaster with cryptocurrencies, as their size and market penetrations continue to grow. So perhaps it is time to let some segment of non-bank financial companies purchase federal deposit insurance if they are willing to pay for it and be subject to bank-like regulation. At least then the fund would be able to collect premiums for the exposures it actually covered. 

Lastly, to lessen the intervention of partisan politics in the oversight of financial institutions, the Senate Banking and House Financial Services committees should be assisted by a new bipartisan Joint Financial Services Committee modeled after the Joint Committee on Taxation. It would be staffed by an elite group of highly compensated and experienced economists, attorneys, accountants and financial professionals and assist members of the majority and minority parties in both houses of Congress to establish sound regulatory strategies and legislation. Optimally, all members of this Joint Committee would opt out of accepting campaign contributions from those under their jurisdiction and, instead, be provided with campaign stipends from taxpayer funds. 

Overwhelming problems demand bold solutions, and there is little doubt that technologies like those used by Bitcoin are forcing our traditional oversight system to the brink of extinction. Politics will no doubt get in the way of change, so let’s be clear about the tradeoffs. If changes like these aren’t made, future financial collapses will cost the taxpayers enormous sums of money neither the FDIC (with a meager $119.4 billion) nor the Treasury have to spend.  

Something must give. 

Thomas P. Vartanian is executive director of the Financial Technology & Cybersecurity Center. A former federal bank regulator and practicing lawyer, he is the author of “200 Years of American Financial Panics” and “The Unhackable Internet.”