The Trump administration is dismantling cryptocurrency regulations initiated under the Biden administration by halting prosecutions of industry players and disbanding the National Cryptocurrency Enforcement Team. This deregulation raises concerns about conflicts of interest and the stability of the financial system, particularly as crypto firms increasingly intertwine with traditional banks. Robust regulatory measures are needed to manage the risks associated with crypto and ensure systemic safety.
The Trump administration is reversing key regulatory measures put in place for cryptocurrency markets, with the Justice Department discontinuing prosecutions of industry stakeholders for violations of banking and securities laws associated with crypto assets. It also disbanded the National Cryptocurrency Enforcement Team initiated by the Biden administration, signalling a shift away from efforts aimed at enhancing transparency and investor protection in the rapidly evolving crypto landscape.
Gary Gensler, previously head of the Securities and Exchange Commission (SEC), resigned on Trump’s first day in office, leading to the dismissal of various cases against notable crypto participants resulting from the market’s downturn in 2022. The implications of deregulation raise significant concerns, particularly regarding potential conflicts of interest, as many crypto firms invested heavily in Trump’s campaign while he himself has launched a crypto venture, aligning his interests closely with the industry.
Moreover, the intersection of cryptocurrency and traditional banking necessitates careful regulation at a time when the role of crypto in global finance is amplifying. The possibility exists for a future where crypto businesses operate largely unregulated, strictly within their ecosystem, thereby isolating them from traditional financial institutions that manage customer deposits and loans, as seen during the crypto winter of three years ago.
In that period, an implosion of several crypto firms led to substantial losses without impacting traditional banks. However, the present reality is different, as major banks, including JPMorgan Chase, are now exploring crypto investments, recognising its potential for significant returns despite its failure as a currency mainly used by criminals. The urgency for better regulation of crypto exchanges is apparent, as many industry participants advocate for reasonable oversight that promotes safety while fostering innovation.
As crypto companies engage in lending and payment facilitation akin to conventional banks, they exhibit much higher instability. Their volatile asset nature risks triggering crises akin to bank runs. Therefore, if these companies are to remain intertwined with traditional banking, they must adhere to stringent regulatory standards, such as capital requirements that ensure adequate reserves against sudden liquidity shortages.
This proposal for regulation exceeds previous attempts by the Biden administration, and with Trump entrenched in the crypto business, significant changes are unlikely. Drawing lessons from the 2008 financial crisis, it is vital to approach the integration of high-risk crypto businesses into the mainstream financial system with extreme caution.
