tag

Finance has been moving fast. From crypto to prediction betting to exchange-traded funds to private credit, new markets—and risks—are proliferating. And in his second term in the White House, Donald Trump is going all-in on deregulation. The US Securities and Exchange Commission (SEC) has flipped from its Biden-era scepticism of crypto to a full embrace. A new law, the Genius Act, has put digital stablecoins that act like dollars in a position to compete with banks for deposits. Regulators at the Federal Reserve are reversing an effort to beef up the capital cushions at large banks.The shift is reflected in both policy and personnel. The SEC’s staffing has fallen by 18% since 2024; the Commodity Futures Trading Commission, which regulates derivatives markets, was down 25% as of January. SEC Chairman Paul Atkins said in a speech that the two agencies will coordinate to usher in “a new golden age of regulatory coherence.” Critics of deregulation worry about what may fall through the cracks. Read on for a snapshot of what’s happening with US watchdogs. The Securities and Exchange Commission: When Atkins took the helm at Wall Street’s top regulator, he promised a new day. Hello to ideas to “make IPOs great again” by making it easier for a company to go public. Goodbye to so-called regulation by enforcement. That’s the label crypto executives and lobbyists applied to many of the SEC’s cases under previous Chair Gary Gensler against crypto companies. They said the agency was applying unclear rules too aggressively.Under Atkins, the SEC has determined that many crypto tokens aren’t securities under its purview but rather commodities to be regulated by the CFTC. More broadly, Atkins says the SEC should embrace new financial technologies. “The SEC’s head-in-the-sand posture—as well as its shoot-first-ask-questions-later approach—are days of the past,” Atkins said in a speech in July.The SEC has dropped more than a dozen crypto enforcement cases and quit several long-running lawsuits. Fines have plummeted. In March the SEC’s head of enforcement resigned just over six months into the job. Her acting replacement, Sam Waldon, said at a legal conference the agency will focus on “quality over quantity” in cases.The agency has also made it harder for small stockholders to bring proposals to public companies and has signalled that it wants to allow Main Street investors to gain access to private credit. There are still rules, though: Staffers in March hit the brakes on a new kind of exchange-traded fund, designed to deliver as much as five times the daily return of an underlying index. “The cops are still in the building,” says Lance Dial, partner at the law firm K&L Gates. The Commodity Futures Trading Commission: Few Americans have heard of the CFTC or understand what it does. With 540 employees, compared with the SEC’s 4,000, the CFTC oversees swaps, futures and certain options. Now it wants a bigger role in regulating crypto and prediction markets—another hot and volatile industry that the Trump administration has embraced. The CFTC has joined with the SEC to write crypto rules. And the CFTC’s new chairman, Michael Selig, has said the agency has “exclusive jurisdiction” over prediction markets such as Kalshi that let customers trade on sports, elections and most anything else. States have initiated several lawsuits contending that these online platforms are actually dressed-up gambling sites that need to be subject to state laws and taxation. Selig disagrees. “To those who seek to challenge our authority in this space, let me be clear: We will see you in court,” he said on X in February.Selig has a lot of work ahead of him, especially because he’s running the CFTC solo. Normally it’s a five-member, bipartisan commission, but Trump hasn’t appointed anyone to fill its four empty seats. Banking regulators: Since the start of Trump’s second term, the Federal Reserve and other banking agencies have loosened restraints on the largest US lenders. Those moves include relaxing how much capital a bank must hold as a buffer against potential losses, narrowing the scope of bank supervision, shrinking a Fed unit dedicated to bank oversight and roping crypto assets into the fold of the traditional banking system.The regulators say these steps are necessary to boost economic growth, increase competitiveness and support ¬innovation—all to the benefit of everyday Americans, who are struggling with an affordability crisis. But the embrace by top banking agencies of the White House’s deregulatory drive has left some academics, attorneys and advocates concerned. Those critics worry the changes now underway could effectively restore the more lax regulatory regime in place before the 2008 global financial crisis.“Banks have a nasty habit of blowing up the financial system when they’re not subject to appropriate guardrails,” says Jeremy Kress, a former Fed bank policy attorney who teaches business law at the University of Michigan. “We know that deregulating often leads to crises, yet this administration seems intent on doing it anyway.” The Consumer Financial Protection Bureau: After the financial crisis, Congress created the CFPB to focus on the welfare of individuals rather than the soundness of financial institutions. Republicans argued that the agency had too much power to impose burdensome rules. Shortly after Russell Vought was appointed acting director, he halted work at the bureau and promised to shutter the agency “within the next two, three months.” But judges in two separate lawsuits against his efforts have forced Vought to request funding from the Federal Reserve so that the agency can operate as Congress intended. Vought is now fighting to be able to slash half of remaining staff, from 1,174 to 556.For now, the agency is performing statutorily required functions and pushing through deregulation, which includes rolling back oversight of nonbank lenders and rewriting a Biden-era rule that would have given bank customers more control of their data. “There’s still a lot of people,” says Alan Kaplinsky, senior counsel of the consumer financial services group at the law firm Ballard Spahr. But he says the agency may be short-handed on the regulatory expertise it needs to push through its new agenda.The agency has cut back bank supervision visits by half and switched from in-¬person to virtual examinations, according to agency memos. Millions of customer complaints, which have been used to start investigations, have been closed without monetary relief. “Rolling back those tools to level the playing field is only going to result in more abuses,” says Tom Feltner, associate director of consumer policy at Americans for Financial Reform, a consumer and investor advocacy group in Washington. 

Having adopted one major piece of digital-currency legislation (the GENIUS Act) and with more pending (the CLARITY Act has passed the House of Representatives), the US is poised to become a major hub for cryptocurrency-related activities, or even – taking President Donald Trump literally – the “crypto capital of the world.” But those who support the new legislation should be careful what they wish for.Unfortunately, the crypto industry has acquired so much political power – primarily through political donations – that the GENIUS Act and the CLARITY Act have been designed to prevent reasonable regulation. The result will most likely be a boom-bust cycle of epic proportions.Historically, US financial markets’ major advantage compared to other countries has been relatively greater transparency, which enables investors to gain a deeper understanding of risks and make better-informed decisions. The US also has strict rules against conflicts of interest, requirements to treat investors fairly (including by protecting their assets in proper custody arrangements), and limits on how much risk many financial firms can take.This framework is not an accident or something that emerged purely through market competition. Rather, it is the result of sensible laws and regulations that were created during the 1930s (after a major disaster) and that have evolved in a reasonable fashion since then. These rules are the major reason why it is so easy in the US to do business, to bring new ideas to market, and to raise capital to support innovation of all kinds.Any individual entrepreneur or even a potential new industry (such as crypto) may balk at these rules, claiming that they are different from anything the world has ever seen. But financial innovation involves risks for the entire financial system, not just for individual investors. The point of regulation is to protect the whole.Many major economies – including the US – learned this the hard way. Over the past 200 years, they have experienced severe financial disruptions and even systemic meltdowns. One such collapse was a major contributor to the Great Depression, which began with a stock-market crash in 1929 and spilled over to bring down many banks (and other investments), destroying millions of Americans’ wealth and dreams. Avoiding a repeat of that experience has long been an important policy goal.But the GENIUS Act does not advance this goal. The law creates a framework for stablecoins, an important emerging digital asset, issued by US and foreign firms, that purports to maintain a stable value against a particular currency or commodity, with the US dollar being the most popular anchor. Stablecoins are useful to investors active in cryptocurrency trading, enabling them to move into and out of particular crypto assets without having to navigate the traditional (non-crypto) financial system. We should expect significant demand, including from non-financial firms (such as Walmart and Amazon) seeking to bypass established payment systems.The business model of stablecoin issuers is to capture the spread between what they pay on their currencies (which is zero interest under this legislation) and what they can receive when they invest their reserves, just like a bank. All the incentives for stablecoin issuers are to invest at least some of their reserves in riskier assets to get higher returns. This will be a major source of vulnerability, particularly when issuers are licensed by permissive state authorities.Indeed, from a systemic perspective, the GENIUS Act’s main shortcoming is its failure to deal effectively with the inherent risk of stablecoin runs, because it prevents regulators from prescribing strong capital, liquidity, and other safeguards. And when any stablecoin issuer – domestic or foreign – gets into trouble, who will step in, and with what authority, to prevent the problems from spreading to the real economy, like in the 1930s?Simply applying the bankruptcy code to failed stablecoin issuers will inevitably impose severe costs on investors, including prolonged delays in receiving what’s left of their money. It will almost certainly exacerbate runs on other stablecoin issuers.Moreover, if the GENIUS Act’s goals include preserving the US dollar as the world’s reserve currency and boosting demand for Treasuries (as stated by its advocates), why does Section 15 of the law allow foreign issuers to invest their reserves in assets such as their own country’s (risky) government debt, even if that debt is not denominated in dollars? We should expect foreign regulators to condone or even favor such arrangements. But then we will have “stablecoins” with fixed dollar obligations, backed in significant part by non-dollar assets – and one can easily imagine what a big appreciation in the value of the dollar will do to such arrangements (spoiler alert: immediate liquidity problems, insolvency fears, and destabilising runs).There is a lot more trouble to come, particularly if any version of the CLARITY Act passes the Senate. This legislation would allow conflicts of interest and self-dealing on a scale not allowed since the 1920s. There are also major national security concerns, to the extent that both the GENIUS Act and the CLARITY bill allow or even facilitate the continued use of stablecoins (and crypto more broadly) in illicit financial transactions.The US may well become the crypto capital of the world and, under its emerging legislative framework, a few rich people will surely get richer. But in its eagerness to do the crypto industry’s bidding, Congress has exposed Americans and the world to the real possibility of the return of financial panics and severe economic damage, implying massive job losses and wealth destruction. – Project Syndicate*Simon Johnson, a 2024 Nobel laureate in economics and a former chief economist at the International Monetary Fund, is a professor at the MIT Sloan School of Management and the co-author (with Daron Acemoglu) of Power and Progress: Our Thousand-Year Struggle Over Technology and Prosperity (PublicAffairs, 2023).