WASHINGTON DC - In a CNBC op-ed published today, Better Markets President and CEO Dennis Kelleher and American Bankers Association President and CEO Rob Nichols detail how "crypto companies and other nonbanks represent a significant and growing risk to our financial system that needs to be better understood." and regulated.โ The full opinion piece can be found below and online. here:
FTX Crash Shows Cryptocurrency Market Needs Bank-Like Regulation
Rob Nichols is President and CEO of the American Bankers Association and Dennis Kelleher is President and CEO of Better Markets, a Washington-based nonprofit that promotes financial market reform.
The recent turmoil in the trillion dollar crypto sector, which includes FTX sudden liquidity crisis and spectacular collapse, has updated the bank run concept โ became famous in movies like "It's a Wonderful Life" and "Mary Poppins." But this time, the run was not on a bank at all.
Instead, many crypto asset customers had accounts at non-bank crypto companies. When they ran (that is, when they simultaneously rushed into large-scale withdrawals), customers saw their withdrawals slow and then companies freeze them in a desperate attempt to stay solvent. Clients were forced to watch helplessly as their accounts plummeted to zero. This is very similar to what happened at non-bank financial firms during the 2008 financial crisis and would have happened when the 2020 pandemic hit had the Federal Reserve not acted so quickly.
The recent bankruptcies of crypto lenders Traveler Y Celsius โ and in algorithmic stablecoin TerraUSD โ make the risks of nonbanks painfully clear to consumers who lost billions in uninsured crypto accounts and investors who have lost trillions of dollars. And now, the largely unregulated non-bank FTX, which had multiple crypto trading activities around the world, saw $6 billion in withdrawals in 72 hours and has completely collapsed amid potential police investigations and the Congress.
The 2008 financial collapse and the 2020 pandemic crisis have already demonstrated that non-banks are not just fringe players in our global financial system; they are critically important and deeply interconnected with the banking system and the economy and can threaten financial stability. And they are growing in importance: Non-bank financial intermediation (sometimes called โshadow bankingโ) accounts for nearly half of the $470 trillion in global financial assets, according to the most recent report from the Financial Stability Board.
More recently, the growth of the trillion-dollar crypto sector, with its many types of assets, exchanges, and wallets, which intersect with conventional finance in various ways, has created a whole new field of unregulated, non-bank players.
Our organizations do not always agree with bank policy. But today, as warning lights are flashing on the economic dashboard and we face both persistent inflation and the risk of a recession in the coming months, we both agree that crypto companies and other nonbanks pose significant risk and growing for our financial system that needs to be better understood and regulated.
The fundamental fundamental principle for putting the shadow banking system on safer ground is this: apply the same regulatory standards to the same products and services, regardless of the origin or technology involved.
Americans need to know that when they engage in any financial activity, whether it's a checking account or a credit card or a car loan, or investing in a digital asset, they have the same fundamental consumer, investor, and financial stability protections. , regardless of who it is. offers the product or service. It would not make sense to say that cars made in a union factory must have seat belts, while cars made in a non-union shop could go without seat belts; instead, our auto regulators set uniform standards for vehicles regardless of who makes them. how or where
That means the providers of these products, both bank and non-bank, must be subject to the same underwriting requirements, the same risk management and regulatory standards, the same cybersecurity and anti-fraud protections, and the same consumer protection standards. consumer. Despite our disagreements on some other banking issues, we share this common ground: the same activity must face the same regulation.
The โsame risk, same ruleโ principle ensures a competitive market with a level playing field where incentives for regulatory arbitrage are minimized, if not eliminated. If you want to serve consumers through the payment system, through deposit or loan products, or through asset management and trade facilitation, you must be subject to the same requirements as all other participants.
This principle also gives policymakers a better window on systemic risk, making sure that we don't allow an economy-wrecking level of risk-taking to build up outside the regulated banking sector, as badly happened in 2008. Like the proverbial man who looks for his glasses under the street light โbecause that's where the light isโ, assessing financial stability should not mean that policymakers should only look for systemic risks in the entities they directly regulate.
Finally, this principle does not mean that a company has to be a bank to offer financial products or services. That's a decision that involves business models, financing, governance and other strategic considerations. There are good reasons for financial intermediaries to be banks, and there are legitimate reasons for some companies to offer financial products or services outside of the banking system.
But while the type of institution may vary, the safeguards must be aligned. Innovation in the financial sector is essential to maximize benefits for consumers, and fair, properly regulated and consistent competition can drive this process forward. But consumers also expect the rules that govern providers, whether bank or non-bank, to protect them and financial stability.
As the hidden risks of more unregulated non-banks materialize and the shadows of an economic downturn lengthen around the world, it is more critical than ever to bring crypto and other shadow banks to light.
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Better Markets is an independent, nonpartisan, nonprofit organization founded in the aftermath of the 2008 financial crisis to promote public interest in financial markets, support financial reform on Wall Street, and make our financial system work for everyone. americans. again. Better Markets works with allies, including many in finance, to promote pro-market, pro-business, and pro-growth policies that help build a stronger, more secure financial system that protects and promotes jobs, savings, retirements, and more. americans. For more information, visit www.mejoresmercados.org.
