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Germany's top regulator this week called for global regulation of the cryptocurrency industry to protect consumers, prevent money laundering and preserve financial stability.
Mark Branson, the president of Germany's financial market regulator BaFin, also known as the Federal Financial Supervisory Authority of Germany, said a that hands-off approach that would "just let the industry grow as a playground for grownups" was the wrong tactic.
"We've seen the self-regulated world. It will not work," Branson told journalists in Frankfurt on Tuesday evening.
Branson was speaking hours after U.S. prosecutors accused Sam Bankman-Fried, founder of cryptocurrency exchange FTX, of misappropriating billions of dollars and violating campaign laws in what has been described as potentially one of America's biggest financial frauds.
[...] Regulation of the industry has been loose and patchwork at best. Germany requires licences for banks to deal with cryptocurrency.
[...] The European Union has been working on a new Markets in Crypto Assets Regulation (MiCA) that some, including European Central Bank President Christine Lagarde, say would need to be broadened out in a future iteration and branded "MiCA 2".
(Score: 2) by sjames on Monday December 19 2022, @09:09AM (19 children)
With better regulation, the earlier irregularities would have been caught before they totally imploded. It would have at least given people a chance to pull out.
Part of regulation is that you have to do the accounting.
(Score: 1) by khallow on Monday December 19 2022, @03:23PM (18 children)
There's two problems here. First, with better regulation, there's more hubris and false sense of security due to the sentiment you mention above. Second, it drops the firewall between risky investments and institutional investors. The crypto market becomes "better regulated" so why shouldn't your pension fund bet the farm on it?
My take is that better regulation is just a prelude to bigger implosions. Presently, these businesses implode so fast (FTX took merely three years) that the outside markets don't have time to lose a lot of money on them. I'd rather have frequent burns of billions of dollars valuation than trillions.
(Score: 2) by sjames on Monday December 19 2022, @04:05PM (17 children)
You really had to bend backwards and grab your ankles to twist that into an argument against regulation. Next up, the best way to eliminate crime is to make everything legal...
(Score: 1) by khallow on Monday December 19 2022, @04:20PM (16 children)
(Score: 2) by sjames on Tuesday December 20 2022, @01:28AM (11 children)
The poor choices regulators made in 2008 was the choice to look the other way while thousands of bad loans were written, each practically designed to fail, then sold off hot potato style to crooks who sliced and diced them like a crypto-coin mixer and slapped a fraudulent AAA label on the resultant CDOs. The loans were traded so fast and furiously that often by foreclosure time, the alleged lender couldn't even produce the paperwork. Finally a few fed-up judges declared a few such foreclosures invalid. Then, those same crooks who had been allowed to get too big to fail (see regulators looking the other way) held the U.S. economy hostage and stuck their hands out for a fat juicy bailout.
And, of course, the regulators had been ordered to look the other way by the anti-regulation free market fanatics in the Bush administration. What needed to happen was for regulators to start throwing flags on the plays back in 2004.
The crypto thing is smaller, in part because it's trying to avoid coming under the sort of scrutiny that might make the music stop.
As for the idea that it doesn't matter because it doesn't immediately affect you personally, that sounds like some cross of Main Character Syndrome and a personality disorder. But be careful! If regulators don't get involved, the next failure may affect the bank that has your money in it.
(Score: 1) by khallow on Tuesday December 20 2022, @02:12AM (10 children)
The regulators made poor choices before 2008 that were just as bad, particularly allowing huge leverage on these securities (50 to 1 leverage as I recall) and providing easy credit. Anything would become a crime-ridden casino under that combination. The criminal activity is a symptom of risk ignorance/hubris not a cause.
(Score: 2) by sjames on Tuesday December 20 2022, @05:03AM (9 children)
The common theme is that the regulators didn't regulate, because they were ordered not to. By anti-regulation free market fanatics.
So I suggest not making that same mistake with Crypto before that whole thing becomes a toxic smoking crater.
(Score: 1) by khallow on Tuesday December 20 2022, @06:01AM (8 children)
While those probably were involved to some minor degree, I think the real reason is that much of the western world, particularly the Bush administration in the US got caught in a Keynesian trap. They aggressively spurred economic growth following 9/11 and the wars of that time via said leverage and plentiful Fed credit. My take is that there were two broad choices - keep this going or cut it off and suffer a mild recession while the western world figured out how to do other things than build houses and issue real estate securities. They chose to keep it going. In the US, it was probably because they thought the good times would continue for a while and they needed that good economy going into the 2008 elections. Instead, it completely fell apart about two months before the elections.
That's the real dynamic that I think is missed here. Not free market absolutists, but politicians and bureaucrats trying to keep the gravy train going because stopping it would cause a recession. And that's the problem with these calls for better regulation. We had that. But the people in charge thought it better to suspend such regulation because any serious enforcement would put a wet blanket on this rapidly growing economic bubble.
My view with crypto is that it's better to just not bother with regulation that'll get suspended when it's politically convenient. In the long run, I think these multi-billion failures will do more to tame irrational bubble dynamics than regulators with massive conflict of interest.
(Score: 2) by sjames on Tuesday December 20 2022, @06:31AM (7 children)
They would have been OK if they had regulated against the time bomb mortgages and CDOs. The problem wasn't house construction, it was building McMansions and convincing people who should have been buying starter homes that they could somehow magically afford them.
The courts bear some responsibility as well. If they had sent the message early on that lenders better have all of their paperwork in order or instead of foreclosure they'll be writing the whole thing off, they would have been a lot more careful and there would have been a lot less robosigning.
(Score: 1) by khallow on Tuesday December 20 2022, @07:13AM (6 children)
It still would have been a shitstorm. Those things are superficial features of a far bigger problem. "Time bomb mortgages and CDOs" were just the chosen form of the Destructor. If they were sufficiently regulated, the risk seekers would have found another way with the heady participants giving zero care about criminality and such because they're going to make zillions of dollars anyway.
(Score: 2) by sjames on Tuesday December 20 2022, @03:50PM (5 children)
But a lot of people would have kept their homes and the big risks would have been forced away from things that were "too big to fail" so we could let the big risk takers take their richly deserved drubbing and move on. Unfortunately, the regulations that kept the big risk takers out of banking were repealed.
(Score: 1) by khallow on Tuesday December 20 2022, @05:12PM (4 children)
More likely, they wouldn't have those homes and be renting instead. Without the high house construction, there wouldn't be a surplus of houses for sale.
Sorry, if it weren't real estate, it'd be something else. When an economy gets into a Keynesian trap like this, it becomes a game of where will the bubbles be? Needless to say, one of those bubbles is crypto.
What gets missed with this urge to regulate cryptocurrency is that there isn't much one can do to regulate it. A typical paper trail will be a series of transactions starting from an anonymizer wallet that's not under the control of the authorities and ending in another such wallet. They won't be able to tell jurisdiction or legality of the trading.
Instead the big problem with regulation is that it would legitimize the involvement of "too big to fail" organizations. That's the point I want to make. When crypto is unregulated, it's just stories in the news for most of us. When crypto is legitimized through regulation, then who knows who will have their hands in the cookie jar? It turns billion dollar problems into trillion dollar problems.
My take is that if regulation is inevitable, at least let the crypto markets crash hard a few times to shake out some of the craziness.
(Score: 2) by sjames on Tuesday December 20 2022, @06:34PM (3 children)
Regulation could make sure that 'stable' coins claimed to be backed by something of value aren't actually backed by empty promises and more magic beans. They could make sure the books aren't cooked. A lot of the monkey business at FTX wouldn't have happened if federal auditors were reviewing the books.
Note that until the recent debacles, several more traditional firms including banks already had their toes in the water. A strong message that crypto won't get them out from under regulation would likely have cooled their already tepid interest.
Note that FTX was already running commercials during sports broadcasts including the Super Bowl, marketing to much less sophisticated investors trying to make themselves look like a bank or a more conservative investment firm in the public's eyes.
The people forced out by foreclosure might have found a nice starter home they could actually successfully maintain or they might have had to remain renting and saving, but at least they wouldn't be renting with their savings wiped out and a foreclosure on their record. The McMansion building boom would have been cooled considerably if nobody could get a loan for a McMansion.
I don't think it's too much to ask that there be enough regulation to keep the books un-cooked and to make sure assurances are actually something like true. If someone wants to set up a 'Wild Blue Yonder Over the Rainbow" coin backed by nothing and "what books?" for accounting, that's fine as long as they say so and have the big red warning sticker on it, as long as pension funds and such are banned from touching it.
(Score: 1) by khallow on Tuesday December 20 2022, @11:37PM (2 children)
What makes you think regulation doesn't already do that? Truth in advertising laws, for example.
I can list a bunch of recent, fully regulated frauds where the regulators "could make sure", but they didn't.
I doubt federal auditors routinely review anyone's books. That's not how they operate. And there's always the two book trick: a real accounting book for yourself, and a fake one for the regulators. The fraudsters got this.
Those debacles are an even stronger message.
And? They aren't now.
So what? If things had gone differently, it'd be a slightly different class of gullible person you'd be defending and a slightly different class of "too big to fail" that you'd be criticizing. Remember there would still a Destructor no matter what form it took. The only way to stop it is to get rid of the underlying engine: leverage and easy credit.
What makes you think it isn't now? There's no law that allowed FTX to get away with what it did. That was all highly illegal. But that's how enforcement regulation works. It's after the fact.
(Score: 2) by sjames on Wednesday December 21 2022, @12:37AM (1 child)
You have successfully argued that regulation needs to be vigorous and have teeth. I agree.
(Score: 1) by khallow on Wednesday December 21 2022, @01:05AM
If we're going to have it, sure. If we don't have it, then it doesn't need to be anything.
(Score: 2) by quietus on Tuesday December 20 2022, @05:28PM (3 children)
While it's true that Fannie Mae and Freddie Mac played a substantive role in the rise of prices in real estate before 2008, let us not forget that the true tools of the Great Recession of 2008 and beyond were CDO's and CDS's, and these were 'self-regulated' by the industry.
(Score: 1) by khallow on Wednesday December 21 2022, @01:17AM (2 children)
Keep in mind as the largest sources of capital, the FMs were the dominant self-regulators of CDOs and CDSs. And a big thing missed here is that US regulators (similarly with European regulators) had determined that institutions playing with these securities could leverage ownership of these securities to ridiculous levels. As I understand it, the securities were treated in the US as being as reliable as normal real estate, which they might well have been - normal real estate was not reliable in 2008 either, and then permitted to be leveraged to the degree of 50 borrowed dollars for every one dollar of ownership - I believe it was 40 to 1 and higher in most of Europe.
And there's plenty of other regulation even in the lands of self-regulated securities.
(Score: 2) by quietus on Thursday December 22 2022, @05:33PM (1 child)
Not exactly. What happened was that banks circumvented their regulated leverage ratio (the amount of cash they need to have at hand versus the amount of loans outstanding). They did so by creating so-called SIVs (structured investment vehicles), whose only purpose was to offload the banks own loan securities, then slice-and-dice 'em with other securities, then sell those mixes as packages to third-party investors. (Slice and dice 'em means taking slices of high-risk loans -- say C-rated -- and combining these with high-quality (say A++) loans, and selling the mix as an A-minus package.)
The devil was with the SIVs, and their limited lifeline (in terms of financial support when things went South) to the banks that created those very SIVs in the first place. The uncertainty with regards to those, and consequentially the CDO/CDS market, was what led to a freezing of the interbank market by the middle to end of October that year; and that was the real crisis.
(Score: 1) by khallow on Friday December 23 2022, @01:15AM
In other words, banks "circumvented" regulated leverage ratio by selling off their loans to other parties? Sounds like their leverage ratio didn't actually change for real.
In other words, the issuing banks weren't threatened by these SIVs going south, their investors who very often were other banks, were.