Since Gary Gensler took the reins as chairman of the Securities and Exchange commission in April, both crypto bull and bears have been eagerly watching the movements of US regulators.
The debate on cryptocurrency regulation in the US is intensifying again.
Just last week, the Wall Street Journal reported the Biden administration is looking to regulate companies that issue stablecoins as bank-like entities. The US Treasury is said to be leading a paper on the administration’s recommendations and that it’s expected to be published later this month.
A number of recent events have causing the spotlight to return to cryptocurrency regulation from high-profile decentralized finance failures, to a tweetstorm by cryptocurrency exchange Coinbase’s CEO criticizing regulators, to China’s Evergrande crisis shining a spotlight on stablecoin reserves one again.
One such expert is billionaire Mike Novogratz, the CEO of Galaxy Digital. Novogratz is seen as a figurehead in the crypto industry, but he’s also had a foot in the traditional world running a successful hedge fund, Fortress Investment Group, as well as reaching partner level at Goldman Sachs.
As scrutiny intensifies, some of the crypto industry’s heavyweights are starting to share their take on what regulators should do next.
“I do think there are excesses in crypto that should be swatted down,” said Novogratz, to a crowd at the Token2049 conference in London.
If it was up to Novogratz, he would focus on what he calls crypto “credit shops”, which are organizations that take deposits from customers in return for providing credit.
He compares these shops to unregulated banks, because they take significant amounts in customer deposits and at the same time, lend those deposits back out with “monster leverage” on their balance sheet. “That’s a recipe for disaster,” Novogratz said.
Although “credit shops” are where Novogratz would focus his attention, he expects the first big regulatory decision to take place around stablecoins. Stablecoins are cryptocurrencies that are pegged to fiat currency on a one-to-one basis. They are, in theory, backed by reserves, such as short-term government bonds and the currency itself. This stability means they offer an accessible entry and exit point to the wider crypto world.
Novogratz describes himself as a “giant alarm ringer” about central bank digital currencies (CBDCs) because of his concerns around governments having access to individual spending data. Instead, he prefers the idea of central banks laying out the framework of how stablecoins should operate and then having the private industry create tokens that meet those criteria and then have them run on multiple public blockchains. He expects a decision on stablecoin regulation in the US to take place within the next three to six months. This is a timeline shared by Paolo Ardoino, the technology chief of Tether, the largest stablecoin by market capitalization. In a recent interview with Insider, Ardoino said he expected additional regulation within the next few months to a year.
Commercial paper is a form of unsecured, short-term debt issued by companies that doesn’t need to be registered with the Securities and Exchange Commission (SEC) as long as it matures before nine months. In 2019, it emerged that Tether held commercial paper as part of its reserves, contrary to its assertion that every tether coin was fully backed by US dollars in bank accounts.
Tether subsequently tweeted that this was “old news from dubious sources”, in response to the report. Hours after Novogratz’s comments at the conference, Bloomberg published the results of an investigation into Tether in which the reporter said they obtained documentation that outlines a detailed account of the firm’s reserves. The documentation showed the company’s reserves featured billions of dollars in Chinese commercial paper.