The FDIC Chair, a Trump era holdover, previewed agency moves on cryptocurrency for the Federalist Society
May 18, 2021
A top banking regulator appointed by former President Trump told a group of well-placed conservative ideologues that she could be overseeing the establishment of rules on cryptocurrency, but that she might not. Chairman of the Federal Deposit Insurance Corporation (FDIC) Jelena McWilliams told the Federalist Society on May 11 that she will first solicit input on the asset class from the banking industry before making any moves.
“One topic that some banks have begun to look at is digital assets,” she said, according to a copy of her remarks released by the FDIC. McWilliams said that the agency will “plan to issue a request for information to learn more about what banks are doing, what banks are considering doing, and what (if anything) the FDIC should be doing in this space.”
The agency followed up on these remarks on Monday by issuing its request for information. McWilliams said in a statement that the FDIC is “laying the foundation for the next chapter of banking by ensuring we have a regulatory framework that allows responsible innovation to flourish.”
While the rulemaking process often takes years, McWilliams' term as FDIC Director doesn't expire until 2023. Before she joined the agency, she was a top executive for the Cincinatti-based bank Fifth Third, the 14th largest bank in the United States.
If the choice of venue for McWilliams' announcement is any indication, Wall Street can expect that the FDIC will approach cryptocurrency to its liking—and not just because McWilliams promised to consult the banking industry, and then floated the possibility of doing nothing. The Federalist Society is a hugely influential right-wing think tank, which receives funding from right-wing billionaires, including industrialist David Koch and hedge fund manager Robert Mercer, to push a deregulatory, corporate-friendly agenda.
The organization is best known for vetting judicial nominees for the Republican Party. Donald McGahn, White House general counsel during the first half of Trump's tenure as president, once joked that Republicans don't “outsource” the judicial nomination process to the Federalist Society because so many of the group's members belong to the upper echelons of the Republican Party. “I've been a member of the Federalist Society since law school. Still am, so frankly it seems like it's been in-sourced,” he said in 2017.
The vast majority of President Trump's top judicial nominees have been members of the Federalist Society. In 2016, when then-candidate Trump issued a list of potential Supreme Court appointees, after the death of former Justice Antonin Scalia, all 11 names on his list were Federalist Society affiliates.
FDIC Chair McWilliams told the organization that she was interested in looking into cryptocurrencies to encourage “innovation that meets consumer demand” while reducing “compliance burdens” and “increasing the number of banked Americans”–a refrain similar to justification offered by regulators for taking a hands-off approach to the “innovation” at the heart of the subprime mortgage crisis, which led to the 2008 global financial collapse and the Great Recession.
“Creating a regulatory system that fosters—rather than stifles—innovation has been a top priority of the FDIC during my tenure, and has been underscored by the experience of the past year,” McWilliams told the Federalist Society, referring to the response to the financial panic that took place in March 2020 as COVID-19 spread across the United States.
Currently, cryptocurrencies are primarily viewed by financial regulators as securities and derivatives, with the most oversight conducted by the Securities and Exchange Commission and the Commodity Futures Trading Commission. Both agencies take a light touch approach to regulating cryptocurrency markets.
“Although the FDIC has limited ability to address the direct cost of developing and deploying technology at any one institution,” McWilliams noted, “there are things that we can do to foster innovation across all banks and to reduce the regulatory cost of innovation.”
In her speech, McWilliams touted a rule finalized last year by the FDIC on so-called “brokered deposits” as a positive example of her approach to innovation. She boasted that the change represented the first tweak to the regulation in “approximately 30 years.”
The rule change narrowed the FDIC's prohibition on third parties that find deposits for institutions that are considered less than well capitalized. Martin Gruenberg, a Democratic FDIC board member, criticized the revisions by saying that they increase the risk of bank runs, and that McWilliams dubiously invoked innovation as a justification for the changes.
“Experience in two financial crises demonstrates that brokered deposits pose a very serious safety and soundness risk to insured depository institutions and the Deposit Insurance Fund,” Gruenberg said in a statement.
“While technology may have a role to play, the Final Rule has not addressed how technology changes the fundamental considerations of the relationship between a bank, a depositor, and a third party intermediary, and the risks the relationship may pose,” he added.
McWilliams' promise to solicit the financial industry's views on cryptocurrency comes roughly one month after JP Morgan Chase CEO Jamie Dimon listed cryptocurrency as an issue for regulators to deal with “rather quickly.” Dimon himself is skeptical of cryptocurrency, but noted earlier this month that “clients are interested, and I don’t tell clients what to do.”
“They want to be able to put it in statements, they want to buy and sell it, if we can help them do those things very very safely with all the proper disclosures, then that's their job to decide what they're going to do with their money,” the JP Morgan CEO said. Other major banks with an interest in cryptocurrency include Citigroup, Morgan Stanley, and Goldman Sachs. Fifth Third, McWilliams' former employer, said that it uses blockchain “in very limited cases for sensitive information.” Blockchain is a technological innovation used to maintain security features of cryptocurrencies like Bitcoin.
However the FDIC and other regulators approach cryptocurrency going forward, it appears that it will be too late to stave off disaster. Though bankers like Dimon might be keen on taking clients' money and putting it in cryptocurrency, many of them see the market crashing in the near future. About one-quarter of financial sector professionals and analysts surveyed by the Federal Reserve between February and April said that cryptocurrencies pose a “potential shock” to financial stability over the next 12-18 months. Almost three-quarters of fund managers responding to a Bank of America survey said in April that the market for Bitcoin, the most prominent cryptocurrency, resembles a bubble.
The price of Bitcoin has increased by 90 percent in the past year. Other lesser known cryptocurrencies have enjoyed even more staggering short-term growth. Dogecoin, which started out as a joke, has seen its price skyrocket this year by 9,000 percent. The amount of money in the global cryptocurrency market increased from about $196 billion in January 2020 to about $2.4 trillion this month, a time frame that has included significant pandemic-related economic hardship. The market cap for Bitcoin increased from about $130 billion in January 2020 to $1.2 trillion in early April. The amount of money in the Bitcoin market has since fallen to about $800 billion in the past few weeks alone.
“You are seeing things in the capital markets that are a bit frothy,” Federal Reserve Chair Powell said on April 28, when asked about the price of Dogecoin. Powell compared Bitcoin to gold in March, calling the cryptocurrency a “speculative asset” with questionable intrinsic value. Federal Reserve Vice Chair Randal Quarles said on May 3 that cryptocurrency represents “a huge opportunity but also a supervisory challenge for the financial system.”
Like McWilliams, Powell and Quarles were also appointed by President Trump. Like McWilliams, they also only appear to be paying attention too late, after enabling what appears to be irrational exuberance.
And even now, it's not clear that their attention actually matters for ideological reasons. Powell, for example, recently dismissed the risks posed to the financial system by the failure of reckless private funds by saying: “we don’t manage [the banks’] companies for them.” He made the remarks after the collapse of private fund Archegos cost Credit Suisse $5.4 billion. Archegos was run by Bill Hwang, a former hedge fund manager who had pleaded guilty in 2012 to insider trading and wire fraud charges and was subsequently banned from trading with public money for at least five years.
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