Crypto should be regulated under existing law, says former FDIC chief

The collapse of cryptocurrency exchange FTX shows that US regulators need to join forces and use existing powers to protect investors rather than wait for new laws, said Sheila Bair, who led the regulatory response to the 2008 financial crisis.

“Regulators need to swallow hard and reach an agreement and then start implementing using the authorities they have now,” Bair, a former head of the Federal Deposit Insurance Corporation, told the Financial Times.

"Set a framework, announce it publicly, implement it through rule changes and policy announcements. But keep going, because more and more people are getting hurt."

Federal regulation of cryptocurrency products and trading has been blocked by claims that they fall between the jurisdictions of the Securities and Exchange Commission, the Commodity Futures Trading Commission and banking regulators. When senators asked U.S. regulators this week who had been monitoring FTX, once worth $32 billion, there was an awkward pause.

There is also a heated debate over whether authorities should issue crypto-focused regulation, with some lawmakers and industry insiders calling for more guidance while market regulators argue that existing laws are sufficiently clear.

Most Americans drawn to Bitcoin and other digital tokens have traded through companies headquartered outside the US, including FTX. This company filed for bankruptcy last week, plunging the digital asset market into crisis. The group's new chief executive said in a court filing that FTX exhibited "a complete failure of corporate controls" and was subject to "flawed regulatory oversight abroad."

“This doesn’t surprise me and it makes me sad,” Bair said. “It was a mistake when the president's task force [on digital assets] said we need legislation and we're throwing a hot potato back to Congress.”

Some opponents of cryptocurrency regulation fear that government oversight would give digital assets undeserved credibility. Bair said that based on her experience with consumer credit, she strongly disagrees. "I really don't like payday loans, but . . . I don't think it validates payday loans by regulating them. They're trying to prevent people from getting hurt."

Bair said she does not expect the collapse in crypto prices to lead to broader financial instability. “To date, most cryptos have never had any real applications in the real world, so the economy does not rely on it the way we rely on our regulated financial system.”

But she worried that the problems at FTX will spill over and affect fintechs trying to use the same type of distributed ledger technology. She is an outside board member of Paxos, which provides cryptocurrency brokerage and settlement services and is regulated by New York State.

"I don't want to throw the baby out with the bathwater. I'm hoping that this will actually lead to a reallocation of capital from speculative things to companies that are really trying to put this technology to good use for something valuable."

"A regulatory imprimatur for them would absolutely help with that. Take these other guys out."