Bitcoin
continued
On January 3, 2023, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency issued a joint statement on the risks crypto assets pose to banking organizations. The list includes:
Risk of fraud and scams among crypto-asset sector participants.
Legal uncertainties related to custody practices, redemptions, and ownership rights, some of which are currently the subject of legal processes and proceedings.
Inaccurate or misleading representations and disclosures by crypto-asset companies, including misrepresentations regarding federal deposit insurance, and other practices that may be unfair, deceptive, or abusive, contributing to significant harm to retail and institutional investors, customers, and counterparties.
Significant volatility in crypto-asset markets, the effects of which include potential impacts on deposit flows associated with crypto-asset companies.
Susceptibility of stablecoins to run risk, creating potential deposit outflows for banking organizations that hold stablecoin reserves.
Contagion risk within the crypto-asset sector resulting from interconnections among certain crypto-asset participants, including through opaque lending, investing, funding, service, and operational arrangements. These interconnections may also present concentration risks for banking organizations with exposures to the crypto-asset sector.
Risk management and governance practices in the crypto-asset sector exhibiting a lack of maturity and robustness.
Heightened risks associated with open, public, and/or decentralized networks, or similar systems, including, but not limited to, the lack of governance mechanisms establishing oversight of the system; the absence of contracts or standards to clearly establish roles, responsibilities, and liabilities; and vulnerabilities related to cyber-attacks, outages, lost or trapped assets, and illicit finance.
The most important point they make in the statement is this: “It is important that risks related to the crypto-asset sector that cannot be mitigated or controlled do not migrate to the banking system.”
“Based on our current understanding and experience to date, the agencies believe that issuing or holding as principal crypto assets that are issued, stored, or transferred on an open, public, and/or decentralized network, or similar system is highly likely to be inconsistent with safe and sound banking practices. Further, the agencies have significant safety and soundness concerns with business models that are concentrated in crypto-asset-related activities or have concentrated exposures to the crypto-asset sector.”
< These guys should know because we’ve all seen this play before. Remember the 2007-2009 Financial Crisis? >
These three agencies probably felt compelled to issue this warning because, this time around the merry-go-round, mainstream financial players are more engaged in the crypto market. In fact, where Wall Street titans once saw disaster, they now see easy money (sound familiar?).
While Ray Dalio, the founder of Bridgewater, was once skeptical of bitcoin, he later called it “one hell of an invention.” In October 2017, Larry Fink of BlackRock referred to bitcoin as an “index of money laundering.” However, by July 2024, he saw it as a “legitimate financial instrument that allows you to have maybe uncorrelated, non-correlated type of returns.”
In fact, The Economist reports that “BlackRock’s bitcoin exchange-traded fund has grown to become the fourth-largest ETF in the hedge-fund world, with a long position worth $3.8 billion. A survey by PwC and the Alternative Investment Management Association suggests that 47 percent of traditional hedge funds now invest in digital assets, up from 21 percent in 2021.”
Even Jamie Dimon, who had all those harsh things to say about bitcoin, has drawn a clear distinction between bitcoin and blockchain technology. “(Blockchain) is different,” he recently said. “Blockchain is a technology ledger system that we use to move information. We’ve used it to do overnight repo, intraday repo, we’ve used it to move money, right? So that’s a technology ledger that we think will be deployable.” Of course, he likely cleared that up because JPMorgan now has its very own cryptocurrency called JPM Coin.
Some might say having storied financial institutions more involved gives the crypto market more legitimacy, but it only makes our trepidation worse. Like the joint statement from the government agencies advised, billions of dollars of traditional finance money moving into this highly decentralized market vastly increases the risk that the volatility and unpredictability of the crypto market could poison the entire global financial ecosystem. While, yes, the JPMorgans and BlackRocks of the world do give legitimacy and credibility to trading cryptocurrencies, at the end of the day, it’s still just a speculative bet.
….and just like in the days leading to the 2007-2009 Financial Crisis, most Americans don’t fully understand the risks involved here. A report released in November 2024 by the Office of Financial Research, a government think tank, warned that “over the 2020 to 2024 period, low-income consumers have significantly increased their debt usage and debt balances. That increase has been particularly large in areas with higher crypto exposure. The magnitude of debt increases has been especially large for mortgage debt. Low-income consumers in high-crypto exposure areas are disproportionately more likely to take out a mortgage, and the average mortgage size is large relative to pre-2020 average income… our results suggest that consumers’ debt and consumption are correlated with their crypto exposure.” In truth, most people would be better off just going to Vegas (not to mention it’s a heck of a lot more fun!).
Because of these red flags – and because we share Warren Buffet’s belief that bitcoin is “probably rat poison squared” – we must watch how all this unfolds like hawks. We compare cryptocurrency to rat poison only because it’s used heavily in things like sex trafficking, money laundering, ransomware, and just scams in general.
The Wall Street Journal reports that Tether, the world’s most traded cryptocurrency, has been a “vital financing tool for several of the U.S.’s top national-security concerns. These include the North Korean nuclear-weapons program, Mexican drug cartels, Russian arms companies, Middle Eastern terrorist groups, and Chinese manufacturers of chemicals used to make fentanyl.”
The WSJ also reports that “despite its place on the U.S. blacklist, which restricts transactions with sanctioned entities, Garantex < a Moscow-based crypto exchange > has become a major channel through which Russians move funds into and out of the country… it has also been a vehicle for Russian cybercriminals to launder their earnings.”
“Garantex’s growing role as a global conduit for illicit funds was underscored by evidence that Palestinian militants in part financed their operations through crypto in the lead-up to the Oct. 7 attacks in Israel. Digital wallets controlled by Palestinian Islamic Jihad, which joined Hamas in the attacks, received a portion of $93 million via Garantex, according to analysis by researcher Elliptic, which said Hamas also used a similar financing strategy.”
Another reason we have to watch how this unfolds like hawks is because we know from deep history that, now that Wall Street is involved, they will push the envelope BIG TIME.