The cryptocurrency industry, initially designed to operate outside traditional financial systems, now finds itself at the heart of regulatory battles in the United States. While early safeguards limited major financial institutions’ exposure to crypto, recent developments suggest those barriers are weakening, raising questions about the potential risks to the broader economy.
In March 2023, two banks with significant cryptocurrency exposure collapsed, highlighting the importance of separating traditional finance from the volatile digital asset market. At that time, retirement and pension funds largely avoided crypto investments, thanks to strict guidance that discouraged fiduciaries from including cryptocurrencies in 401(k) plans. Additionally, the unavailability of crypto assets through traditional brokerages acted as another layer of protection.
However, these protections have gradually eroded. The Securities and Exchange Commission (SEC), despite its reputation as a stringent regulator, has approved exchange-traded products linked to Bitcoin and Ether, making them accessible to traditional investors and funds. Retirement account administrators are increasingly offering crypto exposure, further integrating the digital asset market into mainstream finance.
Lobbying Efforts and Regulatory Rollbacks
The crypto industry has intensified lobbying efforts to overturn restrictions on regulated banks holding cryptocurrencies. A primary target is the SEC’s Staff Accounting Bulletin 121, which requires banks to disclose crypto assets held on behalf of customers and maintain sufficient reserves. Critics within the industry claim the regulation makes it “impossible” for banks to manage cryptocurrencies.
In February 2024, national lawmakers introduced legislation to repeal the bulletin entirely and block similar future measures. Although the bill passed through Congress, it was vetoed by President Joe Biden, who cited concerns over consumer and investor safety. Under a Trump administration, however, such vetoes are unlikely, as pro-crypto lawmakers aim to diminish the SEC’s authority further.
Shifting regulatory oversight to the Commodity Futures Trading Commission (CFTC) is also on the table. The CFTC, with limited funding and experience in retail investor markets, could face challenges in ensuring effective oversight, especially if a crypto-friendly chair is appointed.
Risks to Consumer Protection
The Consumer Financial Protection Bureau (CFPB), created after the 2008 financial crisis, has also come under fire. Venture capitalist Marc Andreessen accused the CFPB of targeting crypto firms unfairly, while Elon Musk has called for its abolition. Critics argue that dismantling the CFPB would eliminate crucial safeguards for fairness in financial services, particularly in emerging areas like digital payments and crypto gaming.
Before the collapse of FTX, its former CEO Sam Bankman-Fried lobbied extensively for legislation that would ostensibly balance industry growth with consumer protection. However, his proposals largely aimed to reduce regulatory oversight, leaving significant gaps that allowed fraud to flourish.
The Future of Crypto in Finance
As institutions and retail investors increasingly embrace cryptocurrencies, the stakes continue to rise. While prices may surge in the short term, driven by optimistic sentiment, fundamental risks and fraud remain widespread within the industry.
Without meaningful regulatory reform, another collapse akin to FTX could prove even more devastating, potentially threatening retirement savings, pension funds, and the broader financial system. The growing integration of crypto into traditional finance raises the specter of taxpayer-funded bailouts to stabilize the market.
As the industry’s influence in Washington deepens, its ambitions of mainstream acceptance may bring unintended consequences for the financial system. The question remains: will the crypto sector’s risks be addressed before they become too big to fail?