Last week, the House voted on a bipartisan basis to stick its collective fingers in the SEC’s eye over its cryptoasset jurisdiction. And, in recent weeks, the Vice Chair of the Federal Reserve has been forced to concede that the end-game capital rules that are his handiwork as much as anyone’s will get a “broad, material” rewrite. What do these two comeuppances have in common? Each results from regulatory hubris so extraordinary that even erstwhile allies abandoned the cause. For all MAGA fears about an omnipotent “administrative state,” these episodes show that those seeking sweeping change without plausible rationales are still subject to the will of the people even if the people’s will befuddles those in the government’s corner offices.
First to the SEC. Chairman Gensler’s position on cryptoassets over the past three years is that many ways to use them are securities and anything that’s a security is his for the enforcing. I’m not even going to venture a conclusion on who’s right or wrong when it comes to abstruse Supreme Court rulings on complex definitions. What underpins the SEC’s downfall – temporary though it may be – is that any question as big as what’s a cryptoasset and who can do what with it should be answered by rules subject to public notice and comment, not episodic enforcement actions meant to teach everyone else a lesson.
Most people would learn the lesson if a coherent regulatory policy spelled it out. When policy is set by whack-a-mole instead of a clear administrative edict, even friends turn skeptical and courts are far more sympathetic to crypto companies that might otherwise have been reined in had the Commission’s rules told the courts why the SEC gets to do what it wants and how this benefits everyone else.
And, friends turn still more skeptical when even reasonable pleas for reform fall on deaf ears. I’m thinking here of Congress’s bipartisan decision to revoke the SEC’s contentious staff accounting bulletin on cryptoasset custody. Among other things, it said that custody assets needed to be held on a custodian’s balance sheet. The goal here is to ensure that cryptoasset custodians – many of whom had scant experience and less capital – didn’t take other people’s money without having some of their own. Fine, but why also subject banks to this same standard given all the capital they have and the rules under which they operate? The SEC never explained this conundrum and thus saw an entire policy overturned it could have salvaged had the Commission proved reasonable.
What about the end-game capital rules? As I said at the time, the cost-benefit analysis in the proposal was barely good enough to be called flimsy. Key assumptions were rarely explained and all possibly-problematic results were explained away by the argument the banking agencies have long attempted: no cost is as grave as a systemic crisis and thus anything the regulators think will avert a crisis warrants all costs.
This might, might even be true given the cataclysmic cost of the 2008 crisis, but regulators at the least owe it to us to make it clear why what they propose in fact could prevent a systemic crisis. The end-game proposal starts with heart-rending descriptions of the March 2023 banking crisis – one that never should have been systemic in the first place. It then lays this debacle out as the grave ill the proposal would surely cure. However, as has been often shown, SVB and Signature succumbed to interest-rate risk management failings overlooked by ineffective supervision that led to sudden liquidity shocks. More capital might have averted the market-capitalization collapse that led large depositors to flee each bank, but this would have been readily achieved by a quick fix to capital recognition for unrealized losses. Why all the other changes to credit-, operational-, and market-risk are warranted is left to the imagination because, again, the cost-benefit analyses don’t say.
There’s actually much in the end-game rules that makes at least some sense – the 2013 Basel III rules do need an update. But, like the SEC, the banking agencies apparently felt they could get what they want because they wanted it, ultimately putting at risk that which makes sense because even allies despaired of getting the regulators to explain the sense they made.