Banking regulators are rushing to craft cryptocurrency rules, according to the Federal Reserve official responsible for overseeing financial regulation, but many fear rule-making is too late, and the unregulated windfall may be. already on the verge of collapsing and causing a wider recession that would hurt the poor the most intensely.

The Fed’s vice chairman of oversight Randal Quarles said on May 25 that his agency and two others – the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) – were taking the lead in what appears to be a rush. to act in a period of instability that could cause serious damage to the rest of the economy. According to a Fed survey conducted between February and April, about 1 in 5 financial professionals believe that a cryptocurrency slowdown could cause a “salient shock to financial stability” over the next 12 to 18 months.

While the rich can lose substantial sums in an economic downturn, working class people invariably suffer the most. The last four recessions and the current COVID-19 recession have pushed millions of marginalized people into poverty, with people of color hit the hardest.

“With the OCC and the FDIC, we are currently engaged in what we call a ‘sprint’,” Quarles said in a hearing before the Senate Banking Committee. The OCC is the primary regulator of federally chartered banks, and the FDIC is the agency that guarantees customer savings and oversees state chartered banks. The Fed oversees bank holding companies and non-bank financial corporations, and regulates the stability of the financial system as a whole.

Quarles said the three agencies have worked “over a relatively concentrated period of time, to bring all of our work on digital assets together and have a common vision, a common framework for their regulatory and supervisory practices towards them.”

“It would be premature for me to tell you where this is going to be,” he added, “but it’s something that is a high priority not only in terms of importance, but in terms of timeline. And we hope to be able to give at least some results soon. “

Regulators’ sudden “sprint” to examine cryptocurrencies could come too late, with the entire market on the brink of collapse. A massive sell-off earlier this month saw cryptocurrencies lose an estimated $ 1,000 billion in one week, up from a global market cap spike of $ 2.5 trillion on May 11.

Volatility has been fueled by the structure of the cryptocurrency markets. Traders can borrow 50 to 125 times the amount of cryptocurrency they buy on popular exchanges. Ownership of cryptocurrencies is highly concentrated in the hands of a relatively small number of owners, with around 42% of all Bitcoin held by 2,155 unique buyers. The value of cryptocurrencies has also fluctuated wildly in recent weeks in response to restrictions imposed by the Chinese government and tweets from billionaire Elon Musk.

“While it is welcome that the Fed, OCC and FDIC look at regulatory gaps in crypto, it is essential that they also look at the implications for systemic risk,” said Alexis Goldstein, senior policy analyst at Americans for Financial Reform. and one Truth donor. “With no cryptocurrency reporting requirements for hedge funds or private equity funds, regulators are in the dark.”

Regulators had the opportunity to act two and a half years ago, after a previous cryptocurrency crash. Since then, the world market has grown considerably, which has compounded the negative consequences of a downturn. The value of the most recent peak in the cryptocurrency market, at $ 2.5 trillion, was three times greater than its previous peak of $ 815 billion in January 2018. The most recent market boom also occurred in a time of great uncertainty and hardship for many around the world amid the COVID-19 pandemic, suggesting that growth may be driven by irrational optimism.

By comparison, there was about $ 1.3 trillion in subprime mortgage debt in March 2007 amid the housing market collapse that triggered the Great Recession. Banks may now be engaged in safer consumer lending practices than they were during the subprime mortgage crisis, but companies have borrowed heavily in recent years, racking up some $ 10.5 trillion. dollars of debt under relaxed lending standards. Fed Governor Lael Brainard warned on May 6 that inflated stock prices and “very high levels of corporate debt should be watched because of the potential for amplifying effects of a price revision event “.

Cryptocurrencies have recovered somewhat since losing $ 1 trillion earlier this month, but many analysts have said the market looks like a bubble. This cohort of skeptics includes Vitalik Buterin, the 27-year-old who co-founded Ethereum, one of the most popular cryptocurrencies. “It could have already ended. It could end in months, ”said Buterin CNN.

Nouriel Roubini, an economist who became famous in 2008 for predicting the subprime crisis and the Great Recession, also believes that a cryptocurrency bubble is bursting. Unlike Buterin, he questions whether cryptocurrency has use value.

“A bubble occurs when the price of something is way above its fundamental value. But we can’t even determine the fundamental value of these cryptocurrencies, and yet their prices have increased dramatically, ”Roubini said on May 21. “In that sense, it looks like a bubble to me.

Despite Quarles’ promise of a “sprint,” recent remarks by one of his colleagues have failed to convey the same sense of urgency. FDIC President Jelena McWilliams said on May 11 at the height of the market that her priorities in reviewing cryptocurrencies were “to enable entrepreneurship to thrive in the United States” and that she would consult with the banking industry to see “what (if anything) the FDIC should do.”

McWilliams made the remarks in a speech to the Federalist Society, a highly ideological right-wing organization known for its adherence to the laissez-faire dogma and for the selection of judicial candidates for the Republican Party. The FDIC issued a request for information on digital assets the week after delivering its speech.

McWilliams and Quarles are both Republicans who were appointed to their current positions by former President Donald Trump. Quarles’ tenure as a top Fed official is due to expire in October. McWilliams’ FDIC presidency will not expire until 2023.

Quarles, in particular, has a reputation for having a rosy view of what will happen if the banks are left to do what they want. In June 2006, when he was Undersecretary of the Treasury, he reacted to predictions of a housing market slowdown by saying, “I have to say I don’t think this is a likely scenario. About two years later, the collapse of the US real estate market brought down the entire global financial system.

The Fed vice chairman was criticized at the Senate Banking Committee hearing on May 25 for more recent laxity by Democratic Senator Elizabeth Warren of Massachusetts. Warren berated Quarles for the Fed’s decision to ease its oversight of Credit Suisse before the bank lost $ 4.7 billion at the end of March after the collapse of the Archegos family fund – a company run by Bill Hwang, a man which had previously been banned by US regulators from managing public money after pleading guilty in 2012 to charges of insider trading and wire fraud.

Warren tore Quarles and the Fed apart for their decision last year to absolve Credit Suisse and other foreign banks from responding to a supervisory board called the Large Institution Supervision Coordinating Committee. She noted that prior to the move, Credit Suisse failed a Fed stress test in 2019 because its models were unrealistic. “Your term as president ends in five months, and our financial system will be more secure when you are gone,” Warren told Quarles.

While the Credit Suisse debacle involved more conventional forms of assets, there are lessons for those concerned about digital asset markets, Goldstein said. truth. She noted that family funds like Archegos Capital Management are not subject to disclosure requirements like other asset management companies.

It would be one thing if the wealthy asset managers only hurt each other. But by playing recklessly with huge sums of money, they risk wreaking havoc throughout the economy. The Great Recession was caused by predatory loans and complex derivatives leading to a systemic failure that sowed misery among the working class, starting with the collapse of investment bank Lehman Brothers in 2008. Into the recession which followed, neighborhoods with more than 40 percent of inhabitants below the poverty line increased their population by 5 million between 2010-2014. A recession could similarly spread if the cryptocurrency market collapses even more.

“There may be several crypto whales the size of an Archegos in the shadows,” Goldstein said. “If so, they would all be invisible to regulators due to the complete lack of reporting requirements for the cryptocurrency.”