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What the Shiba Inu-led memecoin craze says about crypto oversight

·Editor focused on markets and the economy
·4 min read
In this article:
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This article first appeared in the Morning Brief. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe

Tuesday, November 2, 2021

Beware: The regulator cometh

There’s a lot happening in the fast-moving world of cryptocurrency nowadays, and two trends highlighted over the last few days underscore why regulators are trying to get ahead of developments in the sector — even if some think they’re already behind the curve.

While bitcoin sucks up the most oxygen in the crypto world, there are other digital coins that investors and policymakers are just starting to wrap their heads around. Last week, with market players transfixed by the rise of Shiba Inu (SHIB), another memecoin based on the hugely popular “Squid Game” Netflix series came from nowhere.

In a matter of days, the squid coin went supernova — then crashed and burned as developers yanked the rug out from aspiring crypto fortune-hunters. To crib a phrase from that chef from Seinfeld, “no soup for you.”

SHIB’s sudden rise and the commensurate drop in squid couldn't have arrived at a more auspicious time. On Monday, the U.S. government released a long-awaited set of recommendations on how regulators and lawmakers should treat stablecoin, a slice of the digital coin market where values are tied to fiat currencies like U.S. dollars or shorter-dated securities.

Yahoo Finance’s Jennifer Schonberger, who’s been pursuing this story for weeks, noted that the inter-agency recommendations “are intended to curtail risks posed to the financial system,” and that regulators are calling on Congress to mandate that issuers “become banks subject to oversight by the Federal Reserve and the Comptroller of the Currency.”

As one might expect, crypto players like the Chamber of Digital Commerce (which also spoke to Schonberger last week) are pushing back against the idea that an asset whose very existence is predicated upon being stable could pose systemic risk.

Other market participants like Circle co-founder, CEO and Chairman Jeremy Allaire see the writing on the wall, and want to at least make sure they get to choose the ink.

“We are fully supportive of the call for Congress to act and establish federal banking supervision for stablecoin issuance,” said Allaire in a statement.

“The rapid scaling and strategic importance of this to dollar competitiveness in the age of crypto and blockchains is critical. This is huge progress in the acceptance of stablecoins and provides a path for their adoption as fundamental infrastructure for financial and economic activity in the coming decade,” he added.

Given all that’s been happening in the world, true-believing crypto "hodlers" can be forgiven for thinking this is just another governmental power grab. But the central question of regulation revolves around the fact that, for better or worse, cryptocurrency is becoming way more than just an asset class.

The proliferation of products like exchange traded funds, stablecoins and the like are creating an ecosystem in which people can trade digital coins, borrow and lend against them, and conduct transactions denominated in the crypto unit of their choice.

It’s creating a dynamic that Acting Comptroller of the Currency Michael J. Hsu said on Monday was “equal measures awe-inspiring and unsettling. While the salient risks may be mostly trading-related today, tomorrow the risks will be much broader than that and it behooves us as regulators to be strategic in how we approach this and think ahead,” he said in a statement.

“I fully support the recommendations in today’s paper. Stablecoins need federal prudential supervision to grow and evolve safely,” Hsu added.

And in a universe where cryptocurrencies have mushroomed (a recent report by Morgan Stanley pegged them at 10,000 and growing), it’s not hard to see why regulators want to appear proactive instead of reactive.

“Cryptocurrency companies are creating a new system of payments and transactions that competes with traditional finance,” analysts at Morgan Stanley wrote last week in a lengthy report.

“As institutional investor interest intensifies, the crypto regime of leveraged price rises is moving to a regime of regulation,” the bank added.

The stablecoin market by itself is worth an estimated $135 billion of the $2.5 trillion crypto market. And with investors big and small piling into crypto — and the broader market appearing frothier by the day — the federal government would probably prefer to look overzealous than asleep at the wheel when the inevitable instance of criminality and/or meltdown occurs.

By Javier E. David, editor at Yahoo Finance. Follow him at @Teflongeek

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