Crypto should be regulated with existing law, says former FDIC head

The collapse of the cryptocurrency exchange FTX shows that US regulators must combine forces and use existing powers to protect investors rather than wait for new laws, urged Sheila Bair, who helped lead the regulatory response to the 2008 financial crisis.

“The regulators need to swallow hard and get an agreement and then start implementing, using the authorities they have now,” Bair, formerly head of the Federal Deposit Insurance Corporation, told the Financial Times.

“Set a framework, publicly announce it, implement it through rule changes and policy announcements. But get on with it because more and more people are getting hurt.”

Federal regulation of cryptocurrency-related products and trading has been stalled by claims that it falls between the jurisdictions of the Securities and Exchange Commission, the Commodity Futures Trading Commission and banking regulators. When senators asked US regulators this week who had been monitoring FTX, once worth $32bn, there was an awkward pause.

There is also a fraught debate on whether agencies should produce crypto-focused regulation, with some lawmakers and industry figures calling for more guidance while markets regulators argue existing laws are sufficiently clear.

Most Americans attracted to bitcoin and other digital tokens have been trading through entities headquartered outside the US, including FTX. That company filed for bankruptcy last week, sending the digital assets market into crisis. The group’s new chief executive said in a court filing that FTX displayed “a complete failure of corporate controls” and was subject to “faulty regulatory oversight abroad”.

“It’s doesn’t surprise me and it saddens me,” said Bair. “It was a mistake when the president’s working group [on digital assets] said we need legislation and we’re throwing a hot potato back to Congress.”

Some opponents of regulating cryptocurrencies worry that government oversight would give digital assets undeserved credibility. Bair said she strongly disagreed, based on her experience with consumer lending. “I really don’t like payday loans, but . . . I don’t think it’s validating payday loans by providing some regulation over it. They’re trying to prevent people getting hurt.”

Bair said she does not expect the collapse of crypto prices to cause broader financial instability. “To date most crypto has never really had any real world applications, so the economy doesn’t rely on it the way that we rely on our regulated financial system.”

But she did worry that the troubles at FTX will spill over and affect fintechs that are trying to harness the same kind of distributed ledger technology. She is an external board member of Paxos, which offers cryptocurrency brokerage and settlement services and is regulated by New York state.

“I don’t want to throw the baby out with the bathwater. I’m hoping what this will actually do is reallocate capital away from speculative stuff to companies that are really trying to meaningfully use this technology for something of value.

“A regulatory imprimatur for them would absolutely help with that. Shut these other guys down.”