Water is wet, grass is green and central bankers want more rules for bitcoin and cryptocurrency. This time Christopher Waller of the US Federal Reserve (FED) is speaking. He says cryptocurrency investors will demand more regulation in the long run. He cited the reason that consumers have suffered too many losses. Waller was allowed to speak in Switzerland at the SNB-CIF conference on cryptoassets and financial innovation. “From a social perspective, there is another possible outcome when losses become widespread: those losses become practically, politically or morally unbearable. When ordinary investors begin to lose their savings, for no reason at all, except that they want to participate in a hot market, the demand for collective action can quickly increase.” This is what makes ordinary consumers look like stupid investors. He seems to be lumping all non-accredited investors together by stating that no one is aware of the risks and they all suffer from FOMO. Waller continues: “History shows that there will be demands to make individual investors ‘whole’ by socializing their individual losses. We saw it just a few weeks ago after what can only be described as a run on the Terra ecosystem, when regular users sought refunds and even experienced DeFi players discussed ways to compensate small investors.” The debacle surrounding Terra, of course, was a blow to the image of the crypto market, and such excesses should be avoided. But the question is whether that should go through regulation, or whether the crypto community picks this up itself. According to Wallace, new and innovative financial technology will often be regulated at the request of the public if a lot of losses are incurred across the industry. He says that regulation of the sector is not intended to protect the rich, but society in general. “This brings us to the main reason, in my opinion, that society wants to regulate new and poorly understood markets for financial products. It is not intended to protect wealthy investors, but to protect society from the often irresistible pressure to socialize the losses of investors with limited resources and to limit the spread of financial stress.” Is cryptocurrency too big to fail? In addition, Wallace seems to say that cryptocurrency can pose a systemic risk. Large losses in the crypto market, according to him, are not an isolated event, but can affect other areas of society and the economy. An example: suppose the bitcoin price makes a hard blow down, then this could have an effect on the stock market. Many Americans hold shares through their retirement plan (401K) that could reduce their retirement. However, this correlation has not yet been proven. “By definition, those financial externalities, which central banks, including the Fed, are closely monitoring, can lead to losses that innocent parties never signed up for and could not have controlled. Those are the kinds of losses that the public is often asked to cover – and when they do, the public also very often asks for new oversight and new regulations so that the same mistakes are not made again.” Legislation can help, but also harm Regulation is not necessarily wrong, especially not to counter scams or rogue crypto exchanges. There are many new investors who do not know the crypto market well and are therefore prone to FOMO and the promise of quick money. But new legislation should not stand in the way of innovation, and unfortunately that is often a negative side effect. At the same time, large losses are also being suffered in the stock markets this year. For example, many stocks have fallen much harder than bitcoin in 2022.
