Last week the White House issued a Executive Decree or President BidenJoe BidenRepublican senators introduce bill to ban Russian uranium imports directed federal agencies to engage in a “whole of government” approach to assessing crypto risks, which range from national security to environmental stability to financial stability.
Many of the guidelines in the order call for new reports and studies, while others simply acknowledge the work that regulators have already done. The Securities and Exchange Commission has, for example, overseen crypto assets under its jurisdiction for years, as has the Commodity Futures Trading Commission. The Federal Trade Commission filed a handful of actions related to deceptive marketing in crypto systems, and the Treasury Department monitored crypto companies for money laundering and trade sanctions violations.
We agree that regulation of crypto markets is a good thing. There’s no shortage of misrepresentations and outright scams promising “we’re all going to make it” and “get rich quick”. Additionally, cryptocurrency mining uses exorbitant amounts of energy, and concerns about illicit finance have taken on new importance in light of recent sanctions against Russia.
But despite its calls for regulation, the president’s order is disappointing in its underlying message. This suggests that the benefits of crypto are somehow worth incurring its risks – this post is why the crypto industry celebrated the order and may explain why the bitcoin price jumped after his release.
President Biden stipulate that “[t]he rise of digital assets creates an opportunity to strengthen American leadership in the global financial system and at the technology frontier. But is a crypto financial system the one we want? What do we risk by putting a stamp of approval on it?
Many argue that the main promise of crypto is its ability to make our payment system fairer and more equitable: that it is an answer to our chronic problem with financial inclusion. Yet, despite promises of disintermediation, crypto markets are teeming with intermediaries who charge hefty fees. Additionally, most cryptocurrencies are subject to large price fluctuations, making them a very dangerous place to park household savings. Even for those who choose to invest in stablecoins rather than more volatile crypto assets, stability is not guaranteed (stablecoin reserve assets are opaque and it is not clear how a user would recover the fiat currency of a bankrupt issuer). And in many ways, this is all a best-case scenario, as it assumes nothing has been stolen in the many hacks plaguing the crypto markets.
As crypto is increasingly adopted by black and Hispanic communities, it is worth mentioning that there is a long history when it comes to so-called alternative finance and marginalized groups. Payday loans and check cashing services are alternative forms of financing. Subprime mortgages were also an alternative financial service marketed to marginalized groups. Instead of addressing the root causes of financial inequality, these alternative financial services offer costlier, more complicated, or riskier alternatives to traditional finance.
Crypto is often all three: expensive, complicated, and risky.
The Biden administration must recognize that technological innovation alone will not provide access to the simple, reasonably priced financial services that underserved populations need. Moreover, if one were trying to innovate in purely technological ways to improve financial inclusion, crypto – with its deliberately wasteful computational strategies and convoluted governance structures – would not be the optimal technological solution.
Besides the damage alternative finance can inflict on communities of color, these types of services can also (as we have seen with subprime mortgages) be the building blocks of financial crises. Many parallels can be drawn between preparing for the 2008 financial crisis and growing the subset of crypto known as “DeFi.” The increased leverage associated with credit default swaps, the increased rigidity associated with mortgage-backed securities, and the vulnerability of money market mutual funds to races all have their corollaries in a DeFi ecosystem built on distributed ledgers. , tokens, smart contracts and stablecoins. If DeFi turns into a new form of shadow banking, it could be the source of our next financial crisis – and financial crises often hit marginalized groups the hardest, cementing financial inequality.
If we learned anything from 2008, it’s that not all financial innovations are good. The Biden administration should worry less about fostering financial innovation per se and focus more on questioning industry claims about crypto’s potential to promote financial inclusion. Shiny new technologies should not distract from the hard political work that is needed to truly make our financial system more inclusive.
Hilary J. Allen is a professor of law at American University Washington College of Law. Christopher K. Odinet is Professor of Law and Michael & Brenda Sandler Fellow in Corporate Law at the University of Iowa. Follow them on Twitter: @ChrisOdinet and @ProfHilaryAllen