Will Crypto make the same mistakes as traditional finance?
Crypto markets have been in turmoil lately, with prices plunging and investors fleeing. This has led some to compare the current situation to the 2008 financial crisis.
CFTC (Commodity Futures Trading Commission) Commissioner Christy Goldsmith Romero is one of those people. In a recent speech, she warned of the dangers of contagion in the crypto world,. Romero was clear, saying that there are many parallels between the conditions that led to the financial crisis and the current state of the crypto market.
The crypto market remains smaller than most have imagined, but the commissioner foresees growing links between traditional finance and crypto. This relationship increases the risks to the financial system as a whole overall.
With more of a push by the CFTC to get more authority over crypto, Gunsmith’s remarks are more poignant. Authority is something that Chairman Rostin Behnam has also been pushing for. Currently, he believes that there are many conflicts of interest among crypto companies that need to be addressed.
So what exactly are the parallels between the 2008 financial crisis and the current state of the crypto market? Read on to find out.
More leaders of the CFTC are seeking more power to regulate the crypto market .
There have been warnings of a “contagion risk” in crypto and Christy Goldsmith Romero has been very vocal about such issues. During her speech she made the following remarks”
“The vulnerabilities seen during this beginning of what some call the ‘crypto winter’ warn of growing intra-market risks, with parallel themes seen in 2008,”
Her comments speak mostly to the financial crisis caused in part by opaque swap markets. The points she makes also allude to the disastrous events lately in crypto, such as the fall of Terra USD and Three Arrows Capital.
“Just as regulators could not see the true exposures or risk in 2008 due to unregulated companies and products, we cannot see that today with unregulated crypto markets,” stated Goldsmith Romero.
The warning she makes echoes those of other leaders at the CFTC, including Chairman Heath Tarbert, who has said that the agency needs more power to regulate cryptocurrencies. Currently, the CFTC only has authority over derivatives contracts based on digital assets.
The agency is currently working on a rulemaking proposal that would expand its jurisdiction to cover spot market activity in cryptos. However, the proposal has been delayed due to the partial government shutdown earlier this year.
Goldsmith Romero urged Congress to give the CFTC more power over crypto markets, saying that “the time for jurisdictional clarity is now.” Her remarks come as crypto prices have plummeted over the past year, leading to widespread layoffs and losses across the industry.
Goldsmith Romero’s remarks come as the CFTC is pushing for more regulatory authority over cryptocurrency markets. Like Chairman Rostin Behnam, she has raised concerns about conflicts of interest among crypto companies. Separate entities in traditional finance usually handle companies that offer multiple services,. For example, an exchange may also act as a market maker, clearinghouse, lender, and/or custodian.
The financial crisis of 2008
The financial crisis of 2008 was a perfect storm of sorts. A confluence of factors led to the collapse of Lehman Brothers and the near-meltdown of the global financial system.
Among those factors were:
– Excessive risk-taking by financial institutions
– The growth of complex financial instruments
– Loose monetary policy
– Lax regulation and supervision
In the years leading up to the crisis, banks and other financial institutions had been taking on increasingly risky bets. They did this in part because they believed that housing prices would continue to rise, making their investments safe. But when housing prices started to fall in 2006, those bets turned sour.
The complex financial instruments that banks had created were also a problem. These instruments, such as collateralized debt obligations (CDOs), were so complex that even the banks didn’t fully understand them. This amount of complexity made it hard to assess the risks they were taking on.
The loose monetary policy pursued by central banks in the early 2000s helped create the conditions for the crisis. Low interest rates made it easy for banks to borrow money and take on more risk. And when rates started to rise in 2007, it put further pressure on the bank’s investments.
Lax regulation and supervision also played a role. In the years leading up to the crisis, there was a hands-off approach to regulation, which allowed banks to take on more risk than they should have been able to.