President Joe Biden may have just dashed any remaining hopes that Washington would warm to cryptocurrencies under his watch.
The White House nominated Saule Omarova last week to lead the Office of the Comptroller of the Currency, all but confirming that U.S. financial regulators will be void of any crypto allies for at least the next three years.
The Cornell University law professor’s critiques of digital tokens fit right in with statements that have recently emerged from government watchdogs. Securities and Exchange Commission Chair Gary Gensler says the market is “rife with fraud, scams and abuse.” And Michael Hsu, who has been filling in as the OCC’s acting chief, said Sept. 21 that virtual coins might be as dangerous as the complex derivatives that ignited the 2008 financial crisis.
“It took several years for regulators to wake up, but it’s like a bulldozer,” said Jim Angel, an associate professor specializing in market structure at Georgetown University. “It’s slow, it’s steady and it will grind down anything in its path.”
While the outlook for crypto has changed markedly since the end of the Trump administration, the reversal has been particularly sharp at the OCC, which regulates national banks including JPMorgan Chase & Co. and Citigroup Inc. Under Brian Brooks, who stepped down in January, the OCC had granted limited bank charters to cryptocurrency firms — raising concerns among traditional Wall Street players that they might soon face a new slate of competitors. But Hsu, a former Federal Reserve official, pulled up the welcome mat.
If Omarova is confirmed by the Senate, the OCC would likely go even further in pursuing stricter oversight of digital tokens and tougher rules. That would conform with the trend in Washington. Gensler wants crypto to be regulated much like securities are, and a group of financial agencies are considering implementing guardrails around stablecoins such as Tether. The Fed is weighing establishing its own digital currency, which could compete with stablecoins that traders use to buy Bitcoin and other virtual currencies.
Stablecoins — typically pegged to the U.S. dollar and other fiat currencies to avoid the wild price swings that have plagued Bitcoin — have been a top focus for watchdogs.
The Treasury Department has been preparing recommendations on how the government should oversee them, and officials including Undersecretary for Domestic Finance Nellie Liang gave a virtual briefing to U.S. House staff members Tuesday, said people familiar with the meeting. The congressional aides were told that Treasury hopes to issue its report on stablecoins by late October. Among topics Liang addressed were concerns that stablecoins could experience chaotic investors runs similar to those that have affected money market mutual funds, the people said.
A Treasury spokesman declined to comment.
The crypto crackdown is global, with China last week announcing a more restrictive ban on transactions and mining. Karen Shaw Petrou, a managing partner at Washington research firm Federal Financial Analytics, said the darkening clouds showed market participants missed an opportunity to find common ground with regulators — and now it may be too late.
Crypto “conveniently believed that spouting often dubious inclusion and innovation propositions would forestall regulation,” she said. The sector “was extraordinarily intoxicated with the cool factor.”
The industry’s best defense against Omarova may be Republican lawmakers, as she’s expected to face a brutal confirmation battle in the Senate due to controversial statements she’s made about finance. For instance, she has advocated for consumers’ bank deposits to be moved to the Fed from privately run banks.
Lawyers for crypto firms also argue that regulators can’t stand in the way of innovation forever, labeling the current Washington rough patch a bump in the road. “It’s not going to be denied; It’s not even going to be meaningfully delayed,” said Timothy Spangler, a partner at Dechert LLP.
— With assistance by Robert Schmidt