Americans have a high degree of uncertainty about crypto. Only 20 percent have ever owned it, according to a nationally representative survey of 3,208 adults conducted by Consumer Reports from June to July 2022. At least 1 in 5 say they don’t know whether their friends or family own crypto, whether they’d use crypto in different ways, or how crypto firms should be regulated. And there’s substantial public support for crypto regulations. Sixty-two percent of Americans who have heard of crypto say crypto businesses should be regulated the same as other financial businesses, according to CR’s survey.
However, despite the public’s seeming desire for more clarity, financial regulators are still figuring things out about cryptocurrencies. Are they securities like stocks and bonds or are they commodities like gold and oil? Should they continue trading on unregulated non-bank exchanges (famous for their Super Bowl ads featuring stars—like comedian Larry David—who say you don’t really need to understand crypto in order to invest in it) or should crypto-trading happen on highly regulated bank platforms that are mostly shut out of the market?
The Securities and Exchange Commission (SEC) and other government regulators are aware of the dangers the current uncertain climate can present to the millions of retail investors who still have billions of dollars tied up in the market—or who may be considering putting their money into it.
In March the Biden administration released an executive order embarking on a comprehensive approach to the regulation of cryptocurrency and other digital assets. Then in April, SEC chairman Gary Gensler said his agency and the Commodity Futures Trading Commission (CFTC) are examining crypto regulatory issues. (The SEC regulates securities like stocks and bonds, and the CFTC regulates commodities like oil and gold.)
“I’ve asked staff to consider how best to register and regulate platforms where the trading of securities and non-securities is intertwined. In particular, I’ve asked staff to work with the CFTC on how we jointly might address such platforms that might trade both crypto-based security tokens and some commodity tokens, using our respective authorities,” he said.
Banks also would like more clarity from regulators and say they wish the authorities would hurry up in making rules to govern how they might be able to participate in the market. In August, the American Banking Association sent a letter to the Biden administration requesting that it step up efforts to clarify regulations. It says banks are a safer alternative for investors looking to invest in crypto because they’re highly regulated, but without clearer rules on how to join in, the bank group says its members can’t offer their services effectively.
“The combination of these two approaches—inaction on the one hand to bring into the regulatory perimeter non-bank crypto companies, and limitation on the other of banks’ ability to engage responsibly in the digital asset market—creates an environment that makes it nearly impossible for responsible financial innovation to occur in this space, causing it to remain in the Wild West,” wrote Brooke Ybarra, head of the American Bankers Association’s office of innovation.
However, as banks seek ways to enter the crypto investing market more robustly, senators including Elizabeth Warren and Bernie Sanders have called on the Office of The Comptroller of the Currency to walk back rules issued during the Trump administration that had given them some ability to participate. The senators say they’re concerned that the rules “may have exposed the banking system to unnecessary risk,” citing the recent meltdown.
Acting Comptroller of the Currency Michael Hsu defended the regulator’s moves. “I think we’re doing a pretty good job,” he said on Bloomberg. “See Exhibit A: A whole bunch of stuff just happened, and the banking system is in pretty good shape, knock on wood. I think part of that is the actions we’ve taken.”
However, until regulators issue clearer rule making, crypto is likely to continue to be extremely volatile and risky. And even when regulators do issue their new rules, they’ll undoubtedly have a big impact on the price of digital currencies.
Here are four more reasons to be cautious about investing in cryptocurrency.