Tech
Biden’s attack on cryptocurrencies could hand the White House into Trump’s hands
As a financial regulation lawyer, your correspondent can confidently tell you that financial regulation is one of the most boring topics on Earth. Some aspects of the industry, such as regulatory capital requirements, are incredibly boring, usually the exclusive preserve of lawyers who are not only nerds but can be identified as nerds without visual aids from several hundred feet away.
Very rarely, however, does financial regulation affect the rest of the world in profound ways that are only fully recognizable in hindsight. The global financial crisis of 2008, for example, affected us all, but was fully understood by the man in the street only after Hollywood films such as “The Big Short” or “Margin Call” elaborated the crisis in its entirety and they were able to tell the story in a simple way. -understand the terms.
Its creators intended cryptocurrencies as a liberation technology: liberation from banks, both central and private; freedom from invasive questions from retailers who no longer run the risk of liquidation; liberation from censorship by payment processors and their political overseers.
Last week’s presidential veto of a congressional resolution regarding an accounting recommendation from the U.S. Securities and Exchange Commission, titled “Staff Accounting Bulletin 121” or “SAB 121,” is equally arcane and could prove equally consequential. Not because it will lead to a financial crisis (it won’t), but because it could put Donald Trump in the White House.
SAB 121 is an interpretive guidance from the agency that states, in short, that banks that file regulatory filings with the SEC, if they choose to “hold” crypto assets like Bitcoin or Ether on behalf of a third party, must show those assets as a liability on their account. balance sheets. Furthermore, this liability should be periodically updated to reflect the increase or decrease in value of the assets under the bank’s control. As the value of the asset increases, the corresponding liability also increases.
The condition of bank balance sheets has been a major concern of federal regulators since the 2008 crisis. As a reminder, that crisis was caused because banks bundled junk assets such as bonds backed by subprime home loans and held them on their books marked at 100% of their face value even though such assets were, in reality, worth much less.
Today banks are doing exactly the same thing unrealized losses on low-interest loans which started accumulating when the Fed raised rates to fight inflation. Instead of addressing this problem, however, President Biden and the SEC think the problem is Bitcoin and have embarked on a multi-year campaign of regulation through enforcement to suppress the industry in the United States.
Wait, I hear you say; in fact it makes sense for cryptocurrencies to follow the same accounting rules as any other asset on a bank’s balance sheet, right? Safe. However, banks do not normally buy and sell cryptocurrencies on their balance sheets. Since banks make money by making and buying loans, and since cryptocurrencies do not earn interest, banks will not earn money by holding them themselves, but by charging a fixed fee – say 50 basis points per year – to safeguard them for third parties. As such, the way you would expect cryptocurrencies to be treated for accounting purposes when the bank holds them is less like a Treasury bill or RMBS note held by the bank itself and more like the gold watch you have inherited from your Uncle Bob, which is in a deposit box, which the bank does not own.
There is an economic difference because balance sheet liabilities are expensive for banks, while deposits are not. For balance sheet problems, banks must hold so-called “regulatory capital,” highly liquid securities such as U.S. Treasury bonds or cash, and keep it on hand to cover the institution’s liabilities if they ever come due. The higher the assets or the worse the bank’s balance sheet, the more cash the bank must retain to continue operating; since banks make money by lending cash, the more money they have to hold onto, the higher the cost of capital becomes and the less money they make. Deposit liabilities are handled differently, presumably because assets are always available to meet demand. The institution can completely separate the client’s assets from its trading operations, for example, holding them remotely in case of insolvency, so that the loss of crypto assets due to some external event such as an act of God or some failure of the software does not affect the rest of the bank.
Returning to the example of your Uncle Bob’s gold watch in a safe deposit box, if SAB 121 applied to the watch, the bank would not only have to retain the watch; he should also maintain the cash value of the watch and periodically mark it up to market, in cash, idle and unused in a bank account in his name. Treating securities (off-balance sheet) like cryptocurrencies (on-balance sheet) in this way makes the cost of holding cryptocurrencies prohibitive for any bank.
It is in this context that President Biden vetoed a formal resolution of disapproval passed by Congress on a significantly bipartisan basis, including 60-40 in the US Senate, which would have allowed banks to process cryptocurrency custody arrangements as custodial arrangements for everything else: as custodial liabilities, as it should be. The passage of that bill, in turn, was a seemingly knee-jerk reaction by our parliament after a survey was published in early May showing that up to 20% of voters in swing states they considered cryptocurrencies a key election issue.
If cryptocurrencies are a problem in this cycle, it’s for one reason and one reason only: because Donald Trump made them so. If we look at the sequence of events that led to the SAB 121 veto, it is clear that the Trump campaign’s involvement here was cautious, incremental, and deliberate. After a series of back-office engagements with industry in early February, the 45th president mentioned Bitcoin favorably for the first time in a town hall-style forum on Fox News later that month. Having received no backlash, the campaign dropped another mention on March 10, when it suggested allowing people to pay collectible sneakers with Bitcoin in an interview with CNBC.
These early signals passed through the countryside without incident and were regarded, correctly, as olive branches by the industry. Then, at the Libertarian National Convention on May 25, Trump boldly announced, to applause, a broad political program to protect the cryptocurrency industry, including promising to commute the prison sentence of Ross Ulbricht, an early Bitcoin user, from double to life in prison plus 45 years of service. To say that the sector has welcomed this proposal would be an understatement.
Its creators intended cryptocurrencies as a technology of liberation: liberation from banks, both central and private; freedom from invasive questions from retailers who no longer run the risk of liquidation; liberation from censorship by payment processors and their political overseers. Perhaps it’s no surprise that a technology that shows such respect for its users can win their loyalty; It’s refreshing to see that most of our elected politicians, who tend to be younger, are getting that memo.
What remains to be seen is whether this new tech interest group can serve as a kingmaker in American elections. The flurry of crypto activity over the past 30 days in Washington suggests that’s possible. If so, the politics of the near future promise to be very different from the politics of our recent past.