#crypto

19 12, 2022

FedFin on: FSOC Targets Usual Suspects but Also Points to Big-BHC, Nonbank Mortgage Systemic Risk

Arezou Rafikian2023-01-03T15:56:33-05:00December 19th, 2022|The Vault|

As promised, this FedFin report provides an in-depth analysis of FSOC’s 2022 annual report, focusing on findings with near-term policy implications. As always, the report is lengthy and includes many observations and market details that provide insight into Treasury and member-agency-staff thought. Much in it reiterates concerns about short-term funding markets, CCPs, and….

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…

12 12, 2022

Karen Petrou: Where New Crypto Enforcement, Regulatory Action Will Land

Arezou Rafikian2022-12-12T15:50:07-05:00December 12th, 2022|The Vault|

As we’ve learned over the years, a memo written is a memo shared. So it was with my last note on what were then little-noticed links between the tumultuous cryptosphere and what regulators assured us was a banking sector aloof from these violent downdrafts. Sens. Warren and Smith then picked up the examples of several bank/crypto hot spots. The result of new facts combined with heightened political risk will surely lead the bank regulators to follow the tried-and-true strategy of slapping a lot of enforcement actions around before agency heads are hauled up to the Hill. Other than stablecoin legislation, new crypto law is uncertain, but after all the enforcement actions will also surely come new banking crypto regulation.

First, though, to incoming enforcement actions as these lay the groundwork for next-gen regulation. Any bank with big crypto exposures no matter how otherwise pristine is already under its examiner’s gun in terms of immediate demands for an inventory of all crypto actions anytime for anyone. The senators include this in their asks, looking for names as well as activities and customers. But the banking agencies were surely already hot on this trail.

Any bank that failed to mind its prior-notice manners will surely get a public drubbing so that regulators can point to a host of cases that uncover all risks anywhere they lurk. And banks now casting covetous eyes on cheap crypto assets will get a talking to from Washington if their own internal risk managers haven’t already …

5 12, 2022

Karen Petrou: Bank Canaries in the Crypto Mineshaft

Arezou Rafikian2022-12-05T16:34:33-05:00December 5th, 2022|The Vault|

Just because crypto hasn’t triggered a systemic collapse doesn’t mean that it won’t be the perpetrator of quiet banking crashes. We would do well to remember that the 2008 calamity came shortly after the collapse of small subprime-mortgage finance companies. These would have been proverbial dead canaries had anyone looked down the mineshaft. And, even as the U.S. subprime crashes formed into a single, torrential crisis, bank regulators confidently foretold no systemic impact because they comfortably believed that no bank had undue exposure to high-risk mortgages. So bank regulators still say now when it comes to crypto and let’s hope the outcome is different this time. However, bits and pieces of bank wreckage are already to be found in FTX’s rubble and may well surface as the crypto tide continues to ebb. No bank shipwrecks have emerged, but some of the wreckage has the look of a sizeable hull.

The most tantalizing bit of banking wreckage is a super-tiny Washington State bank which FTX appears to have surreptitiously acquired. As the New York Times reported, one of FTX’s affiliates last March invested more than double all the capital previously held in Farmington State Bank, doing so in a carefully-structured way to avoid triggering legal control thresholds. The bank is the nation’s 26^th smallest and, after this generous investment, it deposits went up about 600 percent from its initial $10 million level via four new accounts. Sill more intriguingly, Farmington’s crypto ties via shadow owners appear to go back to …

22 08, 2022

FedFin on: FRB Crypto-Activity Constraints

Arezou Rafikian2023-01-04T10:52:55-05:00August 22nd, 2022|The Vault|

Reflecting the concerns voiced in a recent executive order from President Biden and a subsequent request for views from Treasury, the Federal Reserve has joined the OCC in demanding prior notice from banking organizations that wish to undertake cryptoasset activities. The OCC also warned national banks already engaged in these activities to ensure that they are safe and sound, but the Fed has gone farther. It also demands that state member banks and BHCs already engaged in this sector notify their lead supervisor and ensure that…

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…

12 07, 2022

FedFin on: U.S. Digital-Asset Policy

Arezou Rafikian2023-01-23T16:02:08-05:00July 12th, 2022|The Vault|

As part of its response to the President’s digital-asset executive order, the Department of the Treasury is seeking views on the broad policy questions on which it believes answers might guide the Administration’s next steps. The definition of digital assets on which comment is sought includes central-bank digital currency (CBDC) and other digital representations of value delivered via distributed ledger technology (DLT). As a result, Treasury’s inquiry is comprehensive and results could have far-reaching implications, but the nature of the questions posed are so broad as to provide little indication of how Treasury plans to frame its report to the White House and proceed thereafter.

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…

22 06, 2022

FedFin: Fed Comes Under Heightened Political Pressure

Arezou Rafikian2023-01-25T15:58:37-05:00June 22nd, 2022|The Vault|

As we expected, today’s Senate Banking session with Chairman Powell is a preview of broader national debate ahead of the midterm election. Democrats generally sought to emphasize their understanding of inflation’s costs without lambasting the Fed and, indirectly, the Biden Administration. Still, Sens. Ossoff (D-GA) and Warnock (D-GA) pressed Mr. Powell on the Fed’s failure to begin to tighten last summer. Republicans were strongly united in lambasting….

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…

14 06, 2022

FedFin On: U.S. Digital-Asset Framework

Arezou Rafikian2023-01-27T15:30:30-05:00June 14th, 2022|The Vault|

After protracted negotiations and much public attention, bipartisan senators have introduced a far-reaching bill designed to encourage digital-asset use without undue risk to consumers, investors, or the financial system. The bill decides most, if not all, of the outstanding regulatory barriers to digital-asset use in favor of digital assets and their providers. Provisions in many cases go farther than public discussion has so far noted – for example, the measure not only expands the ability of digital-asset providers to reach retail and wholesale customers, but also gives them access to FDIC resolution without the cost of paying insurance premiums or coming under many of the rules that govern insured depositories…

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…

23 05, 2022

Karen Petrou: The Moral Obligation of Stablecoin Issuers

Arezou Rafikian2023-02-21T14:07:43-05:00May 23rd, 2022|The Vault|

At the height of what proved his fleeting power, the founder of a now-evaporated stablecoin said, “I never debate the poor.” And, perhaps he doesn’t have to – his was not among tall the fiat-currency wallets emptied in the course of this high-flying venture. Those were mostly in the virtual pockets of young and often minority households. Regardless, this statement is stark evidence of the difference between the social-welfare obligations demanded of banks and the get-it-while-you-can ethos embodied by this entrepreneur, Elon Musk, and all their acolytes. We demand much of banks because they take other people’s money. The same obligations should bind stablecoins because they also take other people’s money and thus need to be governed not just for safety and soundness, but also for equality and equity.

It might be argued that a community-service rationale isn’t warranted for crypto-currency because stablecoin issuers are not intermediaries – indeed, this was a defense against new rules laid out at a recent hearing and it’s the rationale behind the Toomey draft bill to craft a federal stablecoin construct, which eschews most prudential and any community obligations for nonbank stablecoin issuers.

Leaving aside the competitive inequity of a two-tier regulatory framework for the same business, there are three compelling public-welfare arguments for subjecting stablecoins and many other virtual currencies to critical components of bank regulation even if they don’t emulate every aspect of a full-service bank.

First, taking money from other people and promising that they can get it back …

18 04, 2022

Karen Petrou: Starry-Eyed Kids Stumbling in the Cryptoverse

Arezou Rafikian2023-03-02T10:55:51-05:00April 18th, 2022|The Vault|

One of the really sort-of sweet things about many who espouse the inevitability of digital assets is boundless hope for crypto domination derived from little knowledge of how the financial system actually works. Last week, a prime example surfaced on Reuters, which touted a plan by which $10 billion of bitcoins would supplant the dollar as the global reserve currency. Here’s to hoping, but the total USD money supply clocks in at close to $22 trillion, suggesting one might need more than a few billion to make even a bit of a dent. Digital currency may well reign supreme, but it won’t be much more than a speculative bet until someone figures out how to integrate it into legacy systems and market, policy, and regulatory realities.

One might say that using M3 as the measure of the dollar’s power is unfair. So, let’s use just currency in circulation. That’s a lot less, but still a formidable $2.3 trillion, a number not only humbling to entrepreneurs, but also progressive Democrats crafting a new form of digital currency via the U.S. Treasury.

Our in-depth analysis assesses this “e-cash” legislation. The idea here is to create a digital asset that is identical to physical dollars in all but physicality. This may be a worthy effort, but it won’t be easy.

Take just one issue: the bill mandates that e-cash be fully private and anonymous but also ensures effective AML enforcement. Quite simply, that can’t happen.

Still, as physical-cash transactions shrink, the absence …

11 04, 2022

Karen Petrou: Why the Gerontocracy is Right about DeFi Risk

Arezou Rafikian2023-03-02T11:37:03-05:00April 11th, 2022|The Vault|

When we started our own analyses of technology-based finance’s stability and equality implications in 2019, we were among the first to focus on disclosures, conflicts of interest, and even self-dealing. Still, we had no idea how many sides of a trade someone could quietly be on if he or she builds out something that purports to be decentralized finance (DeFi) but is anything but. Although regulators have yet to do much about it, their first in-depth DeFi report details a raft of risks they should quickly remedy. Odds are that they won’t until innocent investors and bank customers lose many of their millions, but this too-many-rules-far-too-late habit is particularly dangerous when it comes to fast-moving DeFi.

First and foremost, DeFi isn’t nearly as decentralized as those touting it represent. If DeFi were truly decentralized, then it would be a lot harder for hackers to make off with everything in a DeFi platform in one swipe, but this has a nasty habit of happening over and over again. As a result, at its most essential, DeFi exposes counterparties and customers to loss of assets even if nothing else goes amiss.

And much else could. As the report from the International Organization of Securities Commissions details, DeFi is not only often centralized, but also not even all that digital. Non-digital and centralized aspects of DeFi include not just graphical interfaces with customers and fiat-currency transactions with counterparties, but also very traditional forms of finance such as leveraged trading and rehypothecation …