Article author: Annie Lowrey Article compilation: Block unicorn

Dennis Kelley, President of the non-profit organization Better Markets Dennis Kelleher told me: "The countdown to the next catastrophic crash has begun."

In the past few weeks, I have learned from The Economist , traders, congressional staff and This and similar views were heard from officials. Incoming Trump has promised to pass pro-cryptocurrency regulations and potentially loosen tight restrictions on Wall Street institutions.

They believe that this will bring an unprecedented era of American prosperity and maintain the United States' status as the leader of global capital markets and the core of the global investment ecosystem. “My vision is for America to dominate the future,” Donald Trump said at a Bitcoin conference in July. “I am developing a plan to ensure that the United States becomes the global cryptocurrency capital and the world’s Bitcoin superpower.”

Financial experts expect things to be different. First, there's a boom, maybe a big one, with prices for Bitcoin, Ethereum, and other cryptocurrencies climbing; financial firms making a fortune; and American investors basking in their newfound wealth. Second, there is a depression, perhaps a Great Depression, where companies fail, markets are called upon to stabilize, and many Americans face foreclosures and bankruptcies.

I've been writing about Bitcoin for more than a decade, as well as covering the last financial crisis and its long-lasting aftermath, so I'm familiar with the potential for prosperity and There is some understanding of the cause of the crash. Cryptoassets tend to be extremely volatile, far more so than real estate, commodities, stocks and bonds. With a push from Washington, more Americans will invest in cryptocurrencies. As money pours in, prices will rise. When prices fall, individuals and institutions suffer, as is inevitable.

Experts I spoke to did not dispute this view. But they told me that if that were the case, America and the world should consider themselves lucky. The danger isn’t just that regulations supporting cryptocurrencies could expose millions of Americans to scams and market volatility. The real danger is that this will lead to increased leverage across the financial system. This will increase opacity and make it more difficult for investors to determine and price the risks of financial products. And, this will happen at the same time that Trump is cutting regulations and regulators.

Cryptocurrencies will become more ubiquitous, and traditional financial markets will become more like cryptocurrency markets—crazier, more opaque, more unpredictable, and potentially worth trillions of dollars There are consequences that can last for years.

"I'm worried that the next three or four years are going to look pretty good," said Swar Prasa, a Cornell University economist and former International Monetary Fund official. Eswar Prasad told me. "The real challenge will come when we will have to pick up the pieces from all the speculative frenzy that this term has triggered."

Years Come, Washington is “waging an unprecedented war on cryptocurrencies and Bitcoin,” Trump told cryptocurrency entrepreneurs this summer. "They target your banks. They cut off your financial services... They prevent ordinary Americans from transferring money to your exchanges. They slander you as criminals." He added: "I've experienced this too. situation because I said the election was rigged.”

Trump is right, cryptocurrencies do exist in a separate parallel financial universe. Many crypto companies are unable or choose not to comply with U.S. financial regulations, making their services difficult for ordinary investors to use. (Binance, the world’s largest cryptocurrency exchange, won’t even reveal in which jurisdiction it is registered, instead directing U.S. customers to one of its U.S. branches.) Companies like Morgan Stanley and Wells Fargo tend to Few crypto products are offered, and there is almost no investment in cryptocurrencies and related businesses. The problem is not that banks don’t want to get involved, but that regulations prevent them from doing so, and regulators have explicitly warned them not to do so.

This situation limits the amount of money flowing into cryptocurrencies. But the approach was smart: It prevented corporate failures and wild price swings from disrupting the traditional financial system. Kelleher noted that cryptocurrencies lost $2 trillion of their $3 trillion market capitalization in 2022. "If there was such a huge financial collapse in any other asset, there would be contagion. But that didn't happen because you had parallel systems that had almost no connection to each other."

Upcoming regulatory measures will bring these systems closer together. Granted, no one knows for sure what laws Congress will pass and which Trump will sign. However, the Financial Innovation and Technology Act for the 21st Centuryy for the 21st Century Act (FIT21 for short) provides us with a good reference. The bill, which languished in the Senate after passing the House last year, is the focus of massive lobbying efforts by cryptocurrency advocates, including $170 million for the 2024 elections. The law amounts to an industry wish list.

FIT21 designates the Commodity Futures Trading Commission (CFTC) as the regulator for most crypto assets and businesses, instead of the Securities and Exchange Commission (SEC), and requires the CFTC The information collected about the structure and trading of crypto products is far less than what securities firms provide to the SEC.

In addition to looser rules, financial experts expect lax enforcement. The CFTC primarily regulates financial products used by businesses as hedging and traded among traders, rather than those peddled to individual investors. The CFTC has about one-fifth the budget of the SEC and only one-seventh the staff. Overall, Washington is expected to loosen restrictions, allowing traditional banks to take cryptocurrencies on their books and allowing crypto companies to access U.S. financial infrastructure.

According to Prasad, such regulation would be a "dream" for cryptocurrencies.

Trump and his family have also personally invested in cryptocurrencies. The president-elect has proposed the idea of ​​establishing a "strategic" Bitcoin reserve to prevent a country's Influence. (In practical terms, this means spending billions of taxpayer dollars on speculative assets that have no strategic benefit.) How many members of Congress will invest in cryptocurrencies because Trump invests in cryptocurrencies? How many young people will put money into Bitcoin because Trump’s son Eric says its price will soar to $1 million, or because the Commerce Secretary says it’s the future?

None of the measures being considered by Congress or the White House will reduce the inherent risks. Cryptocurrency investors will remain vulnerable to hacking, ransomware, and theft. Research group Chainalysis tallied $24.2 billion in illicit transactions in 2023 alone. If the United States invests in cryptocurrencies, the incentives for countries such as Iran and North Korea to intervene in the market will increase exponentially. Imagine launching a 51% attack on the Bitcoin blockchain, taking over and controlling every transaction. This situation is a security nightmare.

No measures being considered by Congress or the White House will reduce the value of cryptocurrencies.Inherent risks. Cryptocurrency investors remain vulnerable to hacking, ransomware, and theft. Research organization Chainalysis counted US$24.2 billion in illegal transactions in 2023 alone. If the United States invests in cryptocurrencies, the incentives for countries like Iran and North Korea to intervene in the market will increase significantly. Imagine someone launches a 51% attack on the Bitcoin blockchain, taking over and controlling every transaction. This situation is a security nightmare

Americans will also be exposed to more scams and fraud. The U.S. Securities and Exchange Commission (SEC) has taken enforcement actions against dozens of Ponzi schemes, charlatans and frauds, including the $32 billion fake exchange FTX and a number of shoddy token companies. No one expects the CFTC to have enough power to do the same. And FIT21 has left many loopholes for all kinds of dirty profit-making practices. Crypto firms may legally run exchanges, buy and sell assets themselves, and execute orders for clients at the same time, albeit legally, despite conflicts of interest.

Simple volatility is the biggest risk retail investors face. Prasad emphasized that cryptocurrencies, tokens and other currencies are “purely speculative.” "The only thing that can support its value is investor sentiment." At least gold has industrial uses. Or if you bet on the price of tulip bulbs, at least you might get a flower.

But in the world of cryptocurrency, you may gain nothing or even lose money. Many cryptocurrency traders borrow money to speculate. When traders who use leverage lose money on their investments, their lenders—usually exchanges—require them to post guarantees. To provide security, investors may have to liquidate their 401(k) accounts. They may have to sell Bitcoin during a market downturn. If they are unable to raise cash, the company holding their account may liquidate or seize their assets.

A report released last month by the Office of Financial Research, a think tank, made clear just how dangerous this situation could be: Some low-income earners Households “are using cryptocurrency proceeds to secure new mortgages.” When cryptocurrency prices fall, these families’ homes are at risk.

Many individual investors do not seem to understand these dangers. The Federal Deposit Insurance Corporation (FDIC) had to remind the public that crypto assets are not protected by it. The Financial Stability Oversight Council (FSOC) also raised concerns thatPeople don’t realize that crypto companies are not subject to the same regulations as banks. However, if Trump is also invested in it, how serious is this matter?

However, regulators and economists are not primarily worried about the damage this new era will do to individual households. Their concern is that chaos in the cryptocurrency market could disrupt the traditional financial system — causing a credit collapse and forcing intervention, as it did in 2008.

Once, Wall Street viewed it as fool's gold, but now it is viewed as a gold mine. Bridgewater Associates’ Ray Dalio called cryptocurrencies a “bubble” a decade ago; now he considers it “a tremendous invention.” Blackstone’s Larry Fink once called Bitcoin “the index of money laundering”; today he considers it a “legitimate financial instrument” — one his firm has begun offering to clients , albeit indirectly.

In early 2024, the U.S. Securities and Exchange Commission (SEC) began allowing fund managers to sell certain cryptocurrency investments. Blackstone Group launched a Bitcoin exchange-traded fund (ETF) in November; a public pension fund has put retirees’ hard-earned money into it. Barclays, Citigroup, JPMorgan Chase and Goldman Sachs are also trading in cryptocurrencies. Billions of dollars of traditional financial funds are flowing into the decentralized financial market, and as regulations are relaxed, more funds will pour in in the future.

Are there any problems? If Wall Street firms correctly assess the risks of these risky assets, that's fine. If it's not assessed well, everything could go wrong.

Even the most stable-looking tools are fraught with dangers. Stablecoins, for example, are cryptoassets pegged to the U.S. dollar: one stablecoin is equal to one U.S. dollar, making them a medium of exchange, unlike Bitcoin and Ethereum. Stablecoin companies typically maintain their pegs by holding ultra-safe assets (such as cash and Treasury bonds) equivalent to the value of each stablecoin issued.

It is said. In the spring of 2022, the widely used stablecoin TerraUSD collapsed, dropping its price to just 23 cents. The company had used algorithms to maintain TerraUSD's price stability; as soon as enough people withdrew their funds, the stablecoin lost its peg. Tether, the world’s most traded crypto-asset, claims it is fully backed by secure deposits. But the United States discovered in 2021 that this is not actually the case; in addition, the Treasury Department is consideringis considering imposing sanctions on the company behind Tether for allegedly serving as a conduit for “North Korea’s nuclear weapons program, Mexican drug cartels, Russian arms companies, Middle Eastern terrorist groups and a country’s manufacturer of the chemical fentanyl,” the Wall Street Journal said. reported. (“To suggest that Tether is somehow assisting criminals or circumventing sanctions is outrageous,” the company responded.)

If Tether or other large stablecoins If something goes wrong with a coin, financial chaos could spread immediately beyond the cryptocurrency market. Worried investors would dump stablecoins, leading to “self-fulfilling panic redemptions,” as three academics put it when modeling the possibility. Stablecoin issuers will dump Treasuries and other safe assets to provide redemptions; price drops in safe assets will affect thousands of non-cryptocurrency companies. These economists estimated at the end of 2021 that the risk of a run on Tether was 2.5% – not exactly stable!

Other disasters are easy to imagine: bank failures, exchange collapses, huge Ponzi schemes going bust. However, the biggest risks of cryptocurrencies have little to do with the cryptocurrencies themselves.

If Congress passes FIT21 or a similar bill, it will create a new asset class called "digital goods" - essentially anything that is decentralized Financial assets managed on the blockchain. Digital commodities will not be regulated by the Securities and Exchange Commission (SEC), and “decentralized finance” companies will not be under its regulatory scope. In the FIT21 bill, any company or individual can self-certify a financial product as a digital commodity, and the SEC only has 60 days to object.

This vulnerability is big enough for an investment bank to take advantage of.

Wall Street has begun discussing "tokenization," which is putting assets into programmable digital ledgers. The nominal rationale is capital efficiency: tokenization makes it easier to move money. Another reason is regulatory arbitrage: Blockchain-based investments will no longer be subject to SEC jurisdiction and may face fewer disclosure, reporting, accounting, tax, consumer protection, anti-money laundering and capital requirements. Risk will accumulate in the system; there won't be many ways to control the company.

Gary Gensler, the outgoing chairman of the U.S. Securities and Exchange Commission and the crypto industry’s arch-foe, believes that crypto regulation could ultimately undermine “the broader $100 trillion capital market”. "It might drumNon-compliant entities are encouraged to try to choose the regulatory regime to which they wish to be subject. ”

We saw a similar drama, not too long ago. In 2000, President Clinton signed the Commodity Futures Modernization Act as he was about to leave office. The law placed strict restrictions on exchange-traded derivatives, but placed Over-the-counter derivatives were not regulated, so Wall Street created trillions of dollars in financial products, many backed by mortgage revenue streams, and traded them over-the-counter that bundled subprime mortgages with prime loans. , concealing the true nature of certain financial instruments Then, consumers were weighed down by rising interest rates, weak wage growth, and rising unemployment. Mortgage defaults rose, and house prices fell, first in the Sunbelt and then across the country. No one knew exactly what was contained in those credit default swaps and mortgage-backed securities. No one was sure what the value of anything was. The uncertainty, opacity, leverage, and mispricing contributed to the global financial crisis and ultimately the Great Recession. .

Today’s cryptocurrency market is poised to become the derivatives market of the future if Congress and Trump do nothing — and still keep the Securities and Exchange Commission (SEC) as the regulator of cryptocurrencies. major regulators, requiring crypto companies to comply with existing rules - then the chaos will continue to be isolated. There is no reasonable reason to think that digital assets should be treated differently from securities, according to the simple standards that have been used for more than a hundred years. Cryptoassets should all be considered securities, however, Washington is creating loopholes, not making laws. style="text-align: left;">As cryptocurrency proponents like to say, "Hold on and don't let go," JPMorgan Chase's Jamie Dimon said at a conference in Peru last year. A lot of bankers, they're dancing in the streets. "Maybe they should. Bankers will never be the ones taking the blame.