It’s been a rough 18-months for many cryptocurrency investors, but Federal Reserve Governor Christopher Waller says they should have seen it coming.
“If you buy crypto-assets and the price goes to zero at some point, please don’t be surprised,” Waller said in a Friday speech at a Global Interdependence Center conference in San Diego. “And don’t expect taxpayers to socialize your losses.”
After the Crypto Winter helped spark bankruptcies across the industry and slashed the price of the world’s leading digital asset, Bitcoin, by 64% in 2022, crypto prices have rebounded this year. Bitcoin is now up over 30% year-to-date, and some believe that the run will continue. Cathie Wood, the CEO of ARK Invest, argues that Bitcoin will be a source of stability for people in countries battling inflation, economic crises, and political instability.
“Where do these people go for an insurance policy against an implosion in their purchasing power and wealth? It is in something like Bitcoin. Bitcoin is an insurance policy,” Wood told Bloomberg last week, adding that she expects increased Bitcoin adoption will lead the cryptocurrency’s price to $1 million by 2030.
But the Fed’s Waller views cryptocurrencies in a different light, arguing on Friday that they don’t have any intrinsic value and amount to nothing more than “risky” speculation—“like a baseball card.”
“To me, a crypto-asset is nothing more than a speculative asset,” he said. “If people believe others will buy it from them in the future at a positive price, then it will trade at a positive price today. If not, its price will go to zero. If people want to hold such an asset, then go for it. I wouldn’t do it, but I don’t collect baseball cards, either.”
Under Chair Gary Gensler, who once called the crypto industry the “Wild West,” the Securities and Exchange Commission (SEC) has been cracking down on crypto companies that violate U.S. regulations or offer products that aren’t registered properly. On Thursday, Gensler reached a $30 million settlement with the crypto exchange Kraken over its staking feature that offered users rewards for locking up their crypto to validate “proof of stake” blockchains. And on Friday, he doubled down on his plans to increase regulation in the crypto sector.
“This is largely a non-compliant field, and they’re co-mingling customer funds with their businesses,” he told Bloomberg of crypto exchanges that offer staking services. “We don’t let the New York Stock Exchange also run a hedge fund and trade on the exchange. Why would we do it here?”
Adding to the pressure on the crypto industry, Fed Governor Waller sent a warning in his Friday speech to banks that are looking to jump into cryptocurrencies, saying that he was concerned this could “present a heightened risk of fraud and scams, legal uncertainties, and the prevalence of inaccurate and misleading financial disclosures.”
“While I don’t care if people take on risky investments or engage in risky business ventures, banks and other financial intermediaries must engage in any activity they do in a safe and sound manner,” he said. “A bank engaging with crypto customers would have to be very clear about the customers’ business models, risk-management systems, and corporate governance structures to ensure that the bank is not left holding the bag if there is a crypto meltdown.”
Despite Waller’s warnings about the risks of cryptocurrencies and even potential for “spillovers” into the financial system amid a meltdown, the Fed governor doesn’t believe the whole crypto industry is without merit. He argued that distributed ledger technology—which forms the base of cryptocurrencies’ blockchains—could be useful for a “wide range of data management problems.” And smart contracts, a type of transaction protocol that runs on the blockchain, could be used to speed up securities transactions in the stock market.
“While it is critical that we ensure that the financial stability risks associated with crypto-assets are mitigated, it is important that we keep the various parts of the crypto ecosystem distinct in our minds as the debate about if and how to regulate crypto rolls on,” he said. “Doing so will ensure we do not unduly limit the development and potential future uses of the positive features of the crypto ecosystem.”
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