Thread by @CaitlinLong_

1/ @NYtimes story on #crypto/#banking deserves a thoughtful reply. Issue isn't black & white: anti-crypto forces try to paint us all w/ a broad brush. Bad actors deserve to be called out, but the article ignores fact that regulatory-compliant firms exist. nytimes.com/2021/09/05/us/…

2/ First--@ericliptonnyt/@el72champs you got a fact wrong & it deserves a correction. #Wyoming’s special bank charter doesn't allow “cryptocurrency deposits.” “Deposit” has a v specific meaning in banking: banks can only take deposits in fiat money (US$)--not in crypto. Pls fix.

3/ That’s a key distinction. Regulated banks can provide CUSTODY services for #crypto (like for securities) but CAN’T take deposits in ANYTHING except money. Article misses that critical point--it’s a firewall protecting Fed's payment system from exposure to anything other than $

4/ Same rule applies equally to #Wyoming #SPDI banks & to traditional banks. All regulated banks (via trust powers) have always been able to provide CUSTODY services for assets other than US$ but, again, are expressly prohibited from taking deposits in anything other than money.

5/ Moving on, here’s the key point. Many #crypto intermediaries are bringing the same bad behaviors from traditional finance into #crypto (#rehypothecation, crazy leverage, information asymmetry) + doing so without the capital buffer required in #tradfi. Such criticisms are fair.

6/ Re: the information asymmetry, both the article & @SenWarren are correct. Almost no #crypto intermediaries disclose info abt their solvency--ie, their reserves+capital buffers. Even fewer disclose cryptographic #ProofOfReserves, as many of us have urged them to do voluntarily.

7/ It’s also true that if #crypto intermediaries were actually banks + complied w/ bank capital requirements, they'd hold equity capital buffers of at least 8-15% of their customer assets. How many actually hold 108-115% of customer assets?? Only they know. Yep, info asymmetry.💡

8/ Regarding disclosure & transparency, #DeFi platforms do a far better job than either centralized #crypto intermediaries or traditional financial institutions do. Indeed, the transparency (information symmetry available) to users in most of #DeFi is one of its best attributes.

9/ Article is also correct to point out consumers using leveraged products face potential liquidation for even small moves in #crypto prices. I’ve posited before that if derivatives platforms were to disclose the loss probabilities on leveraged contracts, far fewer would use them

10/ There’s a reason why regulated US #crypto derivatives platforms offer only ~2.5x leverage. Unregulated platforms recently cut their max leverage from 125x to 20x--still far higher leverage than allowed by regulated US platforms. Given those facts, ponder why regulators fret.

11/ But article ignores fact that regulators have approved some incumbent banks to enter #crypto. This can be dangerous for a couple of reasons. First, the knowledge frontier in crypto is not in incumbent banks--ponder how many top crypto developers work for traditional banks??!!

12/ Second, nearly every bank has IT & operational processes that settle their books & records only once a day. But #crypto transactions settle in minutes with irreversibility, so it’s not hard to see how incumbent banks could get into trouble intraday without even realizing it.

13/ Regulated banks that handle #crypto need to be in a straightjacket. That’s the only safe & sound way to integrate the crypto & traditional systems. It’s also exactly what the #Wyoming #SPDI charter requires. For more detail, see pp.5-6 here: federalreserve.gov/SECRS/2021/Jul…

14/ Next, let’s look at the big picture.

“Liquid markets are helpful but not necessary.”--@nickszabo4.

Nick said this in his June keynote in Miami, discussing what’s really necessary for #bitcoin to achieve its store of value function.

15/ In other words, #bitcoin would be just fine without liquid markets. Yep, liquid mkts aren't necessary--but A market is! In 2016 I started warning in @forbescrypto abt bad types of financialization creeping into #crypto, which has happened in a big way during this bull market.

16/ That’s why @SenWarren urging a ban on banking system access (for #stablecoins) is a warning shot. That'd be a big policy mistake--it'd cede leadership in faster/better/cheaper pymt tech to other countries while protecting antiquated US payment systems from needed competition.

17/ A banking ban also wouldn’t achieve what seems to be @SenWarren’s policy goal, since even if the #stablecoin market were banned from further US dollar access it could still function with the ~$117bn of US dollars already in it, the vast majority of which circulate offshore.

18/ A banking ban would just mean those offshore dollars couldn’t come back onshore, but they could keep circulating offshore indefinitely. (Offshore US dollar #stablecoins are a new manifestation of the decades-old “#eurodollar problem”--see pp. 12-15.) federalreserve.gov/SECRS/2021/Jul…

19/ But setting aside #stablecoins, it’s still true that fiat on-ramps do matter to our industry. They may not always matter, but as of today they still do. In fact, I’d argue that they’re really the only type of centralized intermediary that our industry truly needs. Why?

20/ Crypto industry has $2.3 trillion in assets but only ~$80 billion in US dollar bank deposit capacity. The former is growing but the latter really isn’t. Again, I point back to @twobitidiot, who has been warning about US banking concentration as a single-point-of-failure risk.

21/ Interpreting @nickszabo4’s point (“Liquid markets are helpful but not necessary”), all that’s needed is a way in--a market, but not a liquid one. The excesses may help liquidity, but they also feed critics who want to shut down the one intermediary function that is necessary.

22/ And just as important as calling out our industry’s excesses is calling out the critics that paint everything in #crypto with the same negative broad brush--especially while they’re also protecting the incumbent banks that are entering crypto businesses.

23/ It’s a pretty big miss that the @nytimes article mischaracterized the #Wyoming #SPDI bank charter as “cryptocurrency deposits” while also not pointing out how many incumbent banks are getting into the very same #crypto businesses that the article criticizes.

24/ As our industry becomes bigger & more successful, and as some of us (including @AvantiBT) get closer to regulatory approval by submitting to the very same rules as traditional banks (+stricter rules for #crypto), everyone should expect even more pushback from incumbents. /END