Do not regulate crypto as finance

good morning. Disney's fights are fascinating. In the past, the content was king, Disney was the king of content, and Disney's shares rose. But sales are also royal, and now that streaming is the decisive form of sales, the economy of business has changed to bad. We will write about the share shortly, but I'm excited to see what the readers think. Any Disney buyer out there? Someone short? Send me an email: robert.armstrong@ft.com.

do not regulate crypto like stocks and bonds

Michael Barr, deputy supervisory chairman of the Federal Reserve, told the senators last week that the crypto sector needs "an effective supervision that includes security precautions to ensure that crypto companies are subject to similar regulatory security measures as other financial service providers". Similarly, the chairman of the Securities and Exchange Commission, Gary Gensler, said that the basic US laws that regulate securities, stock exchanges, brokers, funds and consultants in the middle of the last century should apply to crypto: "Nothing in the cryptoma markets with the laws of investment is just as relevant, regardless of the underlying technologies. “

Barr and Gensler and others who argue as well as are wrong. It would be a mistake to apply the legal/regulatory/supervisory apparatus used for stocks and bonds to crypto. Fortunately, the efforts that the square pen of Crypto into the round hole of the Securities Act from 1933 ( et al ) have so far only been slow. But there is a risk that this erroneous project will now accelerate. Politicians who smell the smoke of the FTX waste container fire are already asking the financial supervisory authorities what the hell they did, while Sam Bankman-Fried Fröhlich poured in petrol.

The basic outline of a case against the regulation of crypto-like stocks and bonds was presented in a very nice, recently published comment in Alphaville, which was written by the business school professors Stephen Cecchetti and Kim Schoenholtz. Here is the nut:

Simply burn

crypto. Active intervention would give a system undeserved legitimacy that does little to support real economic activities. It would also give a system that is currently not a danger to financial stability. . .

[Regulation] will encourage the banks to both buy crypto-assets and to give them as security, which makes the banking system susceptible to falling market values. . . New rules would lead to a migration of financial activities from the traditional financial world into the even less regulated but newly sanctioned crypto world. . .

The underlying problem is that we still don't really know what crypto-assets are. Currencies? Raw materials? Investment contracts? Ownership of the payment infrastructure? Figures? Simple nonsense? We are still arguing about this and therefore still have no clear idea of ​​the social value or cryptotechnologies. The regulatory mechanisms for securities/investments were developed to protect a number of things that we have hundreds of years with and which have proven to be socially valuable.

The knowledge of Cecchetti/Schoenholtz is that we don't even know whether crypto-assets are investment products at all, but if we regulate them, they will be the appetite of investors to grow on crypto risks.

There are two changes that I would do in the basic Cecchetti/Schoenholtz view. The first is that it can be necessary to regulate crypto as we regulate gambling or smoking. Consumers may have to be protected. The decisive factor is that the FED, the SEC, the Office of the Compotroller of the Currency and the Commodity Futures Trading Commission should not be involved, except to say that they can not touch crypto. Secondly, as a chic lawyer argued to me yesterday, an exception for stable coins (cryptocurrencies coupled to the dollar) may have to be made that amount to the creation of private money and possibly have important uses in payment technologies (I will say this topic for the time being).

The intuition on which the Barr/Gensler believes is simply that someone who buys a crypto asset gives someone money with the expectation of returns, and that is what the existing regulations should capture. This intuition is summarized in US law by the so-called Howey test, which says that something is an investment contract if it is (a) a person who (b) invests in a joint company (c) with the profit expectation (D) Based on the efforts of others.

This four-factor test seems to have been forgotten as a counter-example. But the general objection is that it is a mistake to transform everything that someone thinks is an investment in an investment for regulatory purposes. Many people think that sports betting is a form of investment. Some weather will probably make it a successful investment by considering it as an inefficient market that is waiting to be exploited. And it seems to exist. But nobody argues that the SEC should regulate sports betting because (a) the second would be bad in it and (b) they would send a catastrophic message about gambling.

The point here is not that crypto is a manipulated game with less than zero sums (although it could turn out). The point is again that we don't know what crypto is.

The good news is that we have not yet gone very far on the way to regulating crypto such as stocks and bonds. The most substantial guide to the SEC on this topic, as stated in the Staff Accounting Bulletin 121, states that each SEC regulated platform that protects crypto assets for customers should have corresponding liability and asset entries in their balance sheet, and these entries should reflect the fair value about what the assets are and like can be determined. The OCC and the FED say that the companies they regulate only keep crypto assets, use dollar inlays to secure stablecoins, handle payments via a distributed lid and so on if they can do so in a "safe and solid" way. And they reserve the right to determine whether this standard was met.

The regulatory authority, which has regretted, is the deepest, is the CFTC, the crypto-assets treated as goods and regulated crypto futures. One could argue that the implicit blessing of the CFTC paved the way for Bitcoin ETFs-a pitiful product that attracted many assets and evaporated most of them.

The preliminary introduction of the regulation could be a reason why only one US bank, BNY Mellon, has succeeded in starting a crypto custody program. Unfortunately, asset managers are on. But both the regulatory authorities and industry could now reverse time, money and effort without too much lost time. All it needs is a large regulatory authority that brings courage to say what is slowly clear: we don't know what crypto is, so we are not ready to regulate it. At the moment, investors do not need crypto rules, they have to be warned against it and they are told that they interfere at their own risk.

a good reading

If you missed it at the weekend, Stuart Kirk's first column as an FT investment columnist has put a blow.