The bitcoin crash could be a blessing in disguise for the US financial system

  • The rapid crash in bitcoin challenges the notion that it’s a stable store of value, and raises concerns about possible spillover into other markets.
  • The effects of bitcoin and other cryptocurrencies on broader markets could rise if they become more integrated into Wall Street machinery, analysts say.
  • The crash, which took bitcoin prices to below $US10,000 after having reached a peak near $US20,000, shows the market’s “explosively volatile and unpredictable” nature.

US financial regulators may have just caught a major break when it comes to overseeing the roughshod bitcoin market.

It looks like regulators, particularly in South Korea and China, are set to clamp down on cryptocurrencies, a move that has triggered a reversal in the stratospheric rally in bitcoin this week, pushing its price, which peaked at nearly $US20,000, below $US10,000.

The consensus for now is that bitcoin is too divorced from the traditional banking system to have any ripples on financial stability, although traders warn that could change in the future as Wall Street seeks to own a bigger slice of the digital payments industry.

“If the trading in the futures had gotten some momentum then you would have a link with the real world,” Andrew Brenner, head of international fixed income securities at NatAlliance Securities, told Business Insider.

Bitcoin futures began trading on Cboe Global Markets, the Chicago-based exchange group, in December.

“But this collapse is early without many overlapping positions. So for now” there are no systemic risks, Brenner said.

The latest sharp downturn was set off by renewed regulatory scrutiny throughout Asia, including in South Korea, Japan and China. And according to Lukman Otunuga, Research Analyst at FXTM, “the sharp depreciation witnessed in bitcoin should remind investors on how explosively volatile and unpredictable the cryptocurrency can be.”

That could dampen some of the enthusiasm for cryptocurrencies evident both among the Wall Street crowd, and among regular investors.

It’s not that US regulators have been silent on the matter. Securities and Exchange Commission Chairman James Clayton warned about the risks of “initial coin offerings” in December, noting they are not registered with the SEC and take place outside the existing regulatory structure.

Also last month, J. Christopher Giancarlo, chairman of the Commodity Futures Trading Commission, described bitcoin as “a commodity unlike any the Commission has dealt with in the past.”

“The relatively nascent underlying cash markets and exchanges for bitcoin remain largely unregulated markets over which the CFTC has limited statutory authority,” he said.

And while the Fed has been hands-off role to date, top Fed officials think it’s increasingly inevitable that bank supervisors will have to get a greater handle on the issue of digital transaction systems like Bitcoin.

“The new issue now for the next 10 years is going to be fintech, and how fintech is going to affect financial intermediation in the US,” St. Louis Fed President James Bullard told Business Insider in an interview late last year. “And if you go out to Silicon Valley, all the discussion is all about how can we strip the profits from the big firms.”

Asked about bitcoin a number of times during her December press conference, Federal Reserve Chair Janet Yellen described bitcoin as “a highly speculative asset” that “plays a very small role in the payments system,” adding it is not a “stable store of legal tender.”

Incoming Fed Chair Jerome Powell has also weighed in on the matter, arguing that “innovation not come at the cost of a safe and secure payment system that retains the confidence of its end users.”

He added, in an October speech, that “fintech firms and banks must each play a role in assuring that enhancements to convenience and speed do not undermine safety and security.”

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