JERSEY CITY, N.J.–Crypto-based currencies and payments may have exploded in popularity, and they are only at the beginning of a huge new frontier in financial services, according to companies in the space. But for others, all that growth is “cause for alarm.”
BlockFi, a fast-growing financial start-up, for example, aspires to be the “JPMorgan Chase of cryptocurrency,” according to the New York Times, which noted the company offers credit cards, loans and interest-generating accounts.
But rather than dealing primarily in dollars, BlockFi operates in the rapidly expanding world of digital currencies, one of a new generation of institutions effectively creating an alternative banking system on the frontiers of technology, the Times added.
“We are just at the beginning of this story,” Flori Marquez, 30, a founder of BlockFi, told the Times. The company, which was created in 2017, claims to have more than $10 billion in assets, 850 employees and more than 450,000 retail clients who can obtain loans in minutes, without credit checks.
‘Cause for Alarm’
But to state and federal regulators and some members of Congress, the entry of crypto into banking is cause for alarm, the Times reported.
“The technology is disrupting the world of financial services so quickly and unpredictably that regulators are far behind, potentially leaving consumers and financial markets vulnerable,” according to the report.
As CUToday.info has reported and as the Times noted in its overview, in recent months, top officials from the Federal Reserve and other banking regulators have urgently begun what they are calling a “crypto-sprint” to try to catch up with the rapid changes and figure out how to curb the “potential dangers from an emerging industry whose short history has been marked as much by high-stakes speculation as by technological advances.”
‘Additional Authorities’ Needed
“We need additional authorities to prevent transactions, products and platforms from falling between regulatory cracks,” Gary Gensler, the chairman of the Securities and Exchange Commission, state in an August 2020 letter to Sen. Elizabeth Warren (D-MA), the Times stated. “We also need more resources to protect investors in this growing and volatile sector.”
The Times noted the SEC has created a standalone office to coordinate investigations into cryptocurrency and other digital assets, and it has recruited academics with related expertise to help it track the fast-moving changes. Acknowledging that it could take at least a year to write rules or get legislation passed in Congress, regulators may issue interim guidance to set some expectations to exert control over the industry, the Times added.
The Fed and Treasury are also deep in discussions over getting a regulatory framework in place.
Ongoing Expansion
In the meantime, the crypto space continues to expand.
“The cryptocurrency banking frontier features a wide range of companies. At one end are those that operate on models similar to those of traditional consumer-oriented banks, like BlockFi or Kraken Bank, which has secured a special charter in Wyoming and hopes by the end of this year to take consumers’ cryptocurrency deposits — but without traditional Federal Deposit Insurance Corporation insurance,” the Times reported. “On the more radical end is decentralized finance, or DeFi, which is more akin to Wall Street for cryptocurrency. Players include Compound, a company in San Francisco that operates completely outside the regulatory system. DeFi eliminates human intermediaries like brokers, bank clerks and traders, and instead uses algorithms to execute financial transactions, such as lending and borrowing.”
Consumers ‘Unaware’ of Risks
The Times noted lawmakers and regulators are worried that consumers are not always fully aware of the potential dangers of the new bank like crypto services and decentralized finance platforms. Crypto deposit accounts are not federally insured and holdings may not be guaranteed if markets go haywire.
Among the risks, as reported by the Times: People who borrow against their crypto could face liquidation of their holdings, sometimes in entirely automated markets that are unregulated.