The potential for more regulations on cryptocurrencies from Washington seems like just more bad news for cryptos… but is it?
What’s Going On?
This past week the White House nominated Saule Omarova to lead the Office of the Comptroller of the Currency (OCC). The OCC oversees consumer banking and supervises some of the largest lenders including JPMorgan (JPM) and Bank of America (BAC). Omarova is less than supportive of cryptocurrencies. She has argued the coins are threats to the stability of the economy and said private firms can abuse the tokens to avoid public safeguards. Omarova has also said cryptos allow banks to engage in more activity outside of the oversight of the Fed and other regulatory agencies.
Why This Might Be Good
Despite all this, both traditional investors and traders focused on crypto have reasons for optimism.
First of all, Saule Omarova is certainly qualified as she served as a special advisor in the Treasury Department during George W. Bush’s administration and is a Cornell University law professor who specialized in corporate transactions and advisory work in financial regulation when practicing at Davis Polk & Wardwell.
Secondly, for crypto investors, Omarova can’t be that much more anti cryptocurrencies than the person she’s replacing. Michael Hsu, who’s been running the OCC since May, recently said that crypto and decentralized finance look similar to the instruments leading up to the financial crisis, stating, “Crypto/DeFi today is on a path that looks similar to CDS in the early 2000s.”
But even more importantly, regulations for crypto is not inherently a bad thing.
Regulations = Legitimacy?
Despite coins such as Bitcoin gaining much of its popularity due to it not being under the authority of some central bank, cryptocurrencies potentially have a lot to gain from these authorities. While crypto enjoys some benefits from not being an official currency for any country outside of El Salvador (such as lots of use for semi-legal activities), it has more to gain from being accepted officially.
Retailers and payment systems such as Tesla and PayPal accepting bitcoin are steps in the right direction, but legal authorities have regulations for cryptos will give it a certain legitimacy it simply doesn’t have right now. For any cryptocurrency to become a regular means of payment, it may need to be under the umbrella of regulatory agencies and financial institutions.
The real question is: which coins will actually benefit from regulations and which are going to be most scrutinized by the OCC, SEC, Federal Reserve and other regulators.
Winners and Losers
The big winners of any kind of crackdown and regulation are going to be the biggest coins with the highest market cap and currencies that actually have a unique value proposition. Obviously Bitcoin and Ethereum are the two biggest names that stand out as just those two coins account for roughly 63% of all crytpocurrencies by market capitalization. They’re also the only two coins most casual investors know. Currencies of this size are going to be regulated by the officials as they’re the coins that “threaten the stability of the economy”. The large stablecoins, such at Tether and USDC Which leads to who doesn’t win.
Sh*tcoins. The Federal Reservere and regulatory agencies that are worried about the stability of the financial system couldn't care less about these as they literally account for so little of the market that any “suspicious” activity that goes on here doesn't threaten the global economy. Sure, regulators don’t want fishy things going on at all but there are higher priorities than whatever problems are likely to occur due to Soulja Boy’s next cryptocurrency. These coins may still be less regulated and thus favored for some meme traders and eccentric types, but they’re losers in the game of becoming a legitimate form of payment that brings any type of value to the economy and the world. A regulator with a mandate focused on investor protection, such as the SEC, could step in and try to squash the particularly scammy-seeming projects.
Lastly, stablecoins are in an interesting situation and are currently the top focus for regulators as they are tied to fiat currencies. These coins don’t necessarily offer much growth potential as they are explicitly designed to stay at a stable price (hence the name) but offer tremendous value to institutions as a type of money market fund. Essentially, right now individuals can use stablecoins such as tether as a way to transfer money into other currencies or use it as an extremely short term loan (i.e. overnight loans) to offer liquidity to markets. These types of investment vehicles allow for much faster transfers and loans in parts of the financial system that are typically very highly regulated.
Wrapping Up
So, at the end of the day the OCC will be headed by another crypto critic. However, having concerns about crypto's ability to destabilize the economy isn’t necessarily a bad thing for cryptos overall. Some rules and weeding out of bad operators could encourage wider adoption. Thus, it seems like some increased regulations could be a win for cryptocurrency in the long term despite it seeming going against the original purpose of many crypto projects.
