NYT on Crypto's Move Into Banking
The New York Times published the piece, "Crypto's Rapid Move Into Banking Elicits Alarm in Washington." They explain, "BlockFi, a fast-growing financial start-up whose headquarters in Jersey City are across the Hudson River from Wall Street, aspires to be the JPMorgan Chase of cryptocurrency. It offers credit cards, loans and interest-generating accounts. But rather than dealing primarily in dollars, BlockFi operates in the rapidly expanding world of digital currencies, one of a new generation of institutions effectively creating an alternative banking system on the frontiers of technology.... But to state and federal regulators and some members of Congress, the entry of crypto into banking is cause for alarm. The technology is disrupting the world of financial services so quickly and unpredictably that regulators are far behind, potentially leaving consumers and financial markets vulnerable." The article comments, "BlockFi has already been targeted by regulators in five states that have accused it of violating local securities laws. Regulators' worries reach to even more experimental offerings by outfits like PancakeSwap, whose 'syrup pools' boast that users can earn up to 91 percent annual return on crypto deposits. Treasury Secretary Janet L. Yellen and Jerome H. Powell, the chair of the Federal Reserve, have also voiced concerns, even as the Fed and other central banks study whether to issue digital currencies of their own. Mr. Powell has pointed to the proliferation of so-called stablecoins, digital currencies whose value is typically pegged to the dollar and are frequently used in digital money transfers and other transactions like lending. 'We have a tradition in this country where, you know, where the public's money is held in what is supposed to be a very safe asset,' Mr. Powell said during congressional testimony in July, adding, 'That doesn't exist really for stablecoins.' The cryptocurrency banking frontier features a wide range of companies. At one end are those that operate on models similar to those of traditional consumer-oriented banks, like BlockFi or Kraken Bank, which has secured a special charter in Wyoming and hopes by the end of this year to take consumers' cryptocurrency deposits -- but without traditional Federal Deposit Insurance Corporation insurance." The Times adds, "BlockFi's business is not dissimilar to that of a regular bank. It takes deposits of cryptocurrencies and pays interest on them. It makes loans in dollars to people who put up cryptocurrency as collateral. And it lends crypto to institutions that need it.... The company also offers interest of up to 8 percent per year on crypto deposits, compared with a national average of 0.06 percent for savings deposits at banks in August. How can BlockFi offer such a high rate? In addition to charging interest on the loans it makes to consumers, it lends cryptocurrency to institutions like Fidelity Investments or Susquehanna International Group that use those assets for quick and sometimes lucrative cryptocurrency arbitrage transactions, passing on high returns to customers. And because BlockFi is not officially a bank, it does not have the large costs associated with maintaining required capital reserves and following other banking regulations.... Industry executives say concerns about the safety and stability of digital assets are overblown, but federal financial regulators are still working to get a handle on the latest developments. DeFi protocols largely rely upon stablecoins, cryptocurrencies that are ostensibly pegged to the United States dollar for a steady value but without guarantees that their value is adequately backed. The overall market of stablecoins has ballooned to $117 billion as of early September from $3.3 billion in January 2019. That has regulators worried. 'These things are effectively treated by users as bank deposits,' said Lee Reiners, a former supervisor at the Federal Reserve Bank of New York. 'But unlike actual deposits, they are not insured by F.D.I.C., and if account holders begin to have concerns that they cannot get money out, they might try and trigger a bank run.'"
