All Hits Crypto Enabled.txt
All Hits Crypto Enabled.txt https://bytlly.com/2tEgKc
A Bitcoin ATM is seen at a subway station in Brooklyn Heights in New York City on June 13. Bitcoin and other cryptocurrencies have plunged in value in recent days. Michael M. Santiago/Getty Images hide caption
\"The crypto house is on fire, and everyone is just rushing to the exits because there is a complete loss of confidence in the space,\" says Ed Moya, a senior markets strategist at financial firm Oanda.
\"What this episode, this crash in crypto prices, shows is that cryptocurrencies are by and large speculative financial assets that are subject to macroeconomic forces, such as changes in interest rates,\" says Eswar Prasad, an economics professor at Cornell University.
Celsius, which takes cryptocurrency deposits from individuals and lends them out, stopped withdrawals because it's facing financial trouble. Binance, a cryptocurrency exchange, halted Bitcoin withdrawals for several hours on Monday.
Today, the total value of crypto market has been shaved to about $1 trillion. And if you bought Bitcoin on Feb. 14, the day after that Super Bowl ad bonanza, it is now worth about half of what you paid for it.
The exterior of Crypto.com Arena is seen in Los Angeles on Jan. 26. Many cryptocurrency companies hired celebrities to pitch their products and signed sponsorship deals. Rich Fury/Getty Images hide caption
The SEC is stepping up enforcement actions against crypto companies and considering new rules. Meanwhile, in an executive order, President Biden asked government agencies to make policy recommendations.
And in Congress, Sen. Cynthia Lummis (R-WY) has teamed up with Sen. Kirsten Gillibrand (D-NY), on the first comprehensive crypto legislation. The bill would give more regulatory authority to the Commodity Futures Trading Commission.
Recent volatility has exposed serious vulnerabilities in the crypto financial system.1 While touted as a fundamental break from traditional finance, the crypto financial system turns out to be susceptible to the same risks that are all too familiar from traditional finance, such as leverage, settlement, opacity, and maturity and liquidity transformation. As we work to future-proof our financial stability agenda, it is important to ensure the regulatory perimeter encompasses crypto finance.
Distinguishing Responsible Innovation from Regulatory EvasionNew technology often holds the promise of increasing competition in the financial system, reducing transaction costs and settlement times, and channeling investment to productive new uses. But early on, new products and platforms are often fraught with risks, including fraud and manipulation, and it is important and sometimes difficult to distinguish between hype and value. If past innovation cycles are any guide, in order for distributed ledgers, smart contracts, programmability, and digital assets to fulfill their potential to bring competition, efficiency, and speed, it will be essential to address the basic risks that beset all forms of finance. These risks include runs, fire sales, deleveraging, interconnectedness, and contagion, along with fraud, manipulation, and evasion. In addition, it is important to be on the lookout for the possibility of new forms of risks, since many of the technological innovations underpinning the crypto ecosystem are relatively novel.
We are closely monitoring recent events where risks in the system have crystallized and many crypto investors have suffered losses. Despite significant investor losses, the crypto financial system does not yet appear to be so large or so interconnected with the traditional financial system as to pose a systemic risk. So this is the right time to ensure that like risks are subject to like regulatory outcomes and like disclosure so as to help investors distinguish between genuine, responsible innovation and the false allure of seemingly easy returns that obscures significant risk. This is the right time to establish which crypto activities are permissible for regulated entities and under what constraints so that spillovers to the core financial system remain well contained.
Insights from Recent Turbulence Several important insights have emerged from the recent turbulence in the crypto-finance ecosystem. First, volatility in financial markets has provided important information about crypto's performance as an asset class. It was already clear that crypto-assets are volatile, and we continue to see wild swings in crypto-asset values. The price of Bitcoin has dropped by as much as 75 percent from its all-time high over the past seven months, and it has declined almost 60 percent in the three months from April through June. Most other prominent crypto-assets have experienced even steeper declines over the same period. Contrary to claims that crypto-assets are a hedge to inflation or an uncorrelated asset class, crypto-assets have plummeted in value and have proven to be highly correlated with riskier equities and with risk appetite more generally.2
Due to the cross-sectoral and cross-border scope of crypto platforms, exchanges, and activities, it is important that regulators work together domestically and internationally to maintain a stable financial system and address regulatory evasion. The same-risk-same-regulatory-outcome principle guides the Financial Stability Board's work on stablecoins, crypto-assets, and DeFi; the Basel consultation on the prudential treatment of crypto-assets; the work by the International Organization of Securities Commissions' FinTech network; the work by federal bank regulatory agencies on the appropriate treatment of crypto activities at U.S. banks; and a host of other international and domestic work.4
Second, since trading platforms play a critical role in crypto-asset markets, it is important to address noncompliance and any gaps that may exist. We have seen crypto-trading platforms and crypto-lending firms not only engage in activities similar to those in traditional finance without comparable regulatory compliance, but also combine activities that are required to be separated in traditional financial markets. For example, some platforms combine market infrastructure and client facilitation with risk-taking businesses like asset creation, proprietary trading, venture capital, and lending.
Third, all financial institutions, whether in traditional finance or crypto finance, must comply with the rules designed to combat money laundering and financing of terrorism and to support economic sanctions. Platforms and exchanges should be designed in a manner that facilitates and supports compliance with these laws. The permissionless exchange of assets and tools that obscure the source of funds not only facilitate evasion, but also increase the risk of theft, hacks, and ransom attacks. These risks are particularly prominent in decentralized exchanges that are designed to avoid the use of intermediaries responsible for know-your-customer identification and that may require adaptations to ensure compliance at this most foundational layer.6
Finally, it is important to address any regulatory gaps and to adapt existing approaches to novel technologies. While regulatory frameworks clearly apply to DeFi activities no less than to centralized crypto activities and traditional finance, DeFi protocols may present novel challenges that may require adapting existing approaches.7 The peer-to-peer nature of these activities, their automated nature, the immutability of code once deployed to the blockchain, the exercise of governance functions through tokens in decentralized autonomous organizations, the absence of validated identities, and the dispersion or obfuscation of control may make it challenging to hold intermediaries accountable. It is not yet clear that digital native approaches, such as building in automated incentives for undertaking governance responsibilities, are adequate alternatives.
Connections to the Core Financial InstitutionsThere are two specific areas that merit heightened attention because of heightened risks of spillovers to the core financial system: bank involvement in crypto activities and stablecoins. To date, crypto has not become sufficiently interconnected with the core financial system to pose broad systemic risk. But it is likely regulators will continue to face calls for supervised banking institutions to play a role in these markets.
Bank regulators will need to weigh competing considerations in assessing bank involvement in crypto activities ranging from custody to issuance to customer facilitation. Bank involvement provides an interface where regulators have strong sightlines and can help ensure strong protections. Similarly, regulators are drawn to approaches that effectively subject the crypto intermediaries that resemble complex bank organizations to bank-like regulation. But bringing risks from crypto into the heart of the financial system without the appropriate guardrails could increase the potential for spillovers and has uncertain implications for the stability of the system. It is important for banks to engage with beneficial innovation and upgrade capabilities in digital finance, but until there is a strong regulatory framework for crypto finance, bank involvement might further entrench a riskier and less compliant ecosystem.
Private Digital Currencies and Central Bank Digital CurrenciesStablecoins represent a second area with a heightened risk of spillovers. Currently, stablecoins are positioned as the digital native asset that bridges from the crypto financial system to fiat. This role is important because fiat currency is referenced as the unit of account for the crypto financial system.8 Stablecoins are currently the settlement asset of choice on and across crypto platforms, often serving as collateral for lending and trading activity. As highlighted by large recent outflows from the largest stablecoin, stablecoins pegged to fiat currency are highly vulnerable to runs. For these reasons, it is vital that sta