There’s an old saying attributed to Mark Twain that says, "No man's life, liberty or property are safe while the Legislature is in session." (The quote actually belongs to Gideon John Tucker, the American newspaper editor, lawyer, and politician.)
The words come to mind following a congressional hearing on Wednesday held by the US House Committee on Financial Services, which called witnesses to discuss the regulation of cryptocurrencies in the United States.
The hearing can be viewed on YouTube (see below), but the title of the hearing gives you a pretty good idea of the nature of the discussion: “America on ‘FIRE’: Will the Crypto Frenzy Lead to Financial Independence and Early Retirement or Financial Ruin?”
A Bailout for Cryptos?
Rep. Al Green, chairman of the committee laid out his concerns about cryptos in his opening statement, in which he references several financial calamities: the 2008 Financial Crisis, the Bernie Madoff ponzi scheme, and the Allen Stanford ponzi scheme.
“In each of the cases,” Green said, “investors and financial institutions suffered severe losses then sought and/or received bailouts from the federal treasury. Their refrain seems to have been, ‘Keep the government out of my life, until I lose money.’”
Green wonders if digital asset investors will similarly seek bailouts if the price of cryptocurrencies run to zero.
“If we believe that such is not the role of the federal government, should there be an amount or form of reserves required to backstop digital securities should they fail?” Green asks.
What really appears to bother Green, however, is that cryptocurrencies could have a “systemic impact” on the US economy.
“If so, should there be greater federal oversight and rating agencies to evaluate the risk and the performance of these digital assets?” he asks.
Do Cryptos Pose a Systemic Risk to the Economy?
The claim that cryptocurrencies pose a systemic risk to the economy is a serious charge, one I’d not heard before. A memorandum produced by the Financial Services offered some details on this claim.
“Cryptocurrency business operations could also pose risks to investors if businesses fail due to illicit activities or the inability to deliver the promised products or services,” the memo reads. “In addition to risks to investors, some experts have raised concerns that leveraged cryptocurrency positions and cryptocurrency derivatives could present systemic risks to the global economy.” (emphasis added)
Who are these experts warning of these systemic risks? The body of the memo offers no clue, but the answer can be found in a footnote. The “experts” referenced are one man: Jim Cramer, host of CNBC’s “Mad Money.”
As Nathaniel Whittemore pointed out on his podcast at CoinDesk, one would expect that such a serious claim—that cryptos pose a systemic risk to the US economy—would be buttressed by robust academic literature. Instead, the House of Representatives memo provides a link to an article published in The Street, which highlights a single tweet by Mr. Cramer.
“Time for the SEC to consider crypto and [sic] asset worth regulating,” Cramer tweeted. “that's what yesterday was about: the need for regulation. One hundred to one leverage is not healthy for the system. New systemic risk identified.”
Time for the SEC to consider crypto and asset worth regulating.. that's what yesterday was about: the need for regulation. One hundred to one leverage is not healthy for the system. New systemic risk identified.— Jim Cramer (@jimcramer) May 20, 2021
Cramer’s call for regulation, it should be pointed out, was made shortly after the Mad Money host sold “almost every bit of my bitcoin and my Ethereum.”
Indeed, reports show that a month before Mr. Cramer called for new regulations on cryptos, he was publicly celebrating that he had paid off a mortgage with his bitcoin profits.
“I now own a house — lock, stock and barrel — because I bought this currency,” Cramer crowed on “Squawk on the Street.”
Fact: Cryptos Are Already Regulated
One will watch the two hours of House testimony—a long two hours—in vain for serious evidence showing cryptocurrencies pose a systemic risk to the economy. (Alexis Goldstein, a policy director at the Open Markets Institute, tries, but her testimony warning against large concentrations in the crypto market—such as Dogecoin—fall well short.)
Indeed, the notion that cryptos are not subject to regulatory oversight is false. As Christine Parker, a partner at Reed Smith LLP, pointed out in her testimony, cryptocurrencies are regulated by numerous governing bodies.
“Crypto exchanges like Gemini and Coinbase are not regulated like the Chicago Mercantile Exchange or the New York Stock Exchange, but they are regulated by the New York Department of Financial Services as limited purpose trust banks,” Parker noted.
“They are subject to AML (anti-money laundering) and KYC (know your customer) requirements like any other federal or state regulated bank. The Commodities Futures Trading Commission has anti-fraud and anti-manipulation authority over the purchase and sale of bitcoin and Ethereum on these trading markets and has actively used that authority in this space.
There’s simply no compelling evidence to support the idea that cryptocurrencies pose “systemic risks” to the global economy. (The entire crypto market, it should be pointed out, is about $1.6 trillion, smaller than the market caps of several US companies, including Apple, Amazon, and Microsoft.)
Do cryptos pose risk? Of course. That’s the nature of financial markets, and digital assets are still in their infancy and relatively volatile. But as Parker points out, cryptos are not uniquely volatile. Only a year ago, after all, oil prices (briefly) turned negative for the first time in history. In February, natural gas markets were a rollercoaster ride that saw prices rise 900 percent.
The reality is, regulations are not a cure for asset volatility.
The Real Threat
Congressman Green is trying to protect investors from cryptos, which he says “could run to zero.” But the real threat to cryptos are people like Green seeking to regulate or ban them outright.
The notion that cryptocurrencies pose a threat to the global economy or taxpayers is silly. The only people who stand to lose money are the investors themselves—unless people like Green decide to shield investors from their losses (once again).
Those bailouts should never have happened. But using past big government bailouts as justification for more big government intervention in the future is rich indeed.