Crypto’s ‘Snake Oil’ Problem May Stymie Payment Ambitions

No easy path ahead for crypto. Not for use in payments, it seems, and not for trading.

The regulatory screws, as you might term them, are poised to tighten even further on bitcoin and other digital offerings no matter where they are used.

And the pressure may be felt, most keenly, and most immediately, by the traders/speculators who have been the ones churning those cryptos in the markets, moving prices up and down several percentage points in a day, even within minutes.

As Sen. Elizabeth Warren, Democrat of Massachusetts, told CNBC on Wednesday (July 28), the day after a hearing on the crypto industry, that regulating cryptos might take a precedent from regulating drugs in the past.

“As long as people can sell snake oil,” she said, people did not invest in actually making drugs that helped people. But with the advent of the Food and Drug Administration (FDA), she said, companies and individuals turned their attention to developing what grew into a “much better market” that helped the world at large.

Speaking directly of cryptos and regulations specifically, she said, “I don’t want to wait until a whole lot of small investors, and a whole lot of small traders are completely wiped out. I think rules of the road” and a “cop on the beat will let bad actors know that somebody’s watching.” During the interview, she pointed specifically to pump and dump schemes.

“Who takes advantage of there being no rules?” she asked rhetorically. “It’s the big guys.”

Asked by CNBC what she thought of cryptos’ potential to disrupt traditional financial services, Warren pointed to digital currencies as a way to reach the unbanked or underbanked “who are paying way too much to be able to have their paycheck cashed or pay their utility bills or their rent.” Central bank digital currencies (CBDCs) would be a low-cost way to provide access to banking services, she said.

Warren’s comments came a day after she sent a letter to U.S. Treasury Secretary Janet Yellen detailing concerns over risks tied to cryptos that could be addressed by Yellen’s Financial Stability Oversight Council. Those concerns include risks to banks “if cryptocurrency companies are able to gain banking charters without being able to abide by the same safety and soundness regulations to which traditional banks are subject.” Stablecoins also posed risks, she said, as they are largely unregulated and may be risky for financial stability in the event there is a “run” on those coins in a bid to liquidate them in large quantities. Cyberattacks are a consistent threat too, according to Warren’s missive.

Existential Questions 

That letter came in tandem with a Capitol Hill hearing Tuesday (July 27) titled “Cryptocurrencies: What are they good for?” Per testimony offered by Jerry Brito, executive director of the Coin Center, bitcoin “is instead more accurately classified as a commodity. Therefore, regulations that apply to securities and securities markets should not apply to bitcoin and cryptocurrencies like it.”

Here, then, between the Warren comments and the hearing comments lie some of the crucial, existential questions surrounding cryptos themselves: What they are, how they should be regulated, and even who should get to hold them.

In recent weeks and months, as noted in this space, the Treasury Department and others have been circling cryptos, while stablecoins have been drawing more attention, too. Nothing has a chilling effect quite like legal action, so the payment ambitions of bitcoin et al may face headwinds until the “trading and exchange” components are effectively guard railed. But then again, CBDCs may do much to squelch those commerce ambitions outright. Time will tell, but in the meantime, much hangs in the balance.