The Last Look…

SEC chair Gary Gensler is attracting a lot of “heat” as they say in the US, especially from the crypto industry – but this is not his first rodeo and when it comes to unpopular regulation Gensler has, as we say in London, “previous”.

At the start of 2010 in Profit & Loss, I was behind the headline on the front cover which accompanied a picture of the then-CFTC chair, which simply asked, “Is This the Most Dangerous Man in FX?” The question was more from the perspective of retail FX firms, although OTC derivatives were very much in his sights thanks to what appears to be a long-standing and misguided belief that totally transparent markets are best.

In 2010, the big drive from the Gensler-led CFTC was to rein in leverage, as well as to enforce minimum capital requirements and registration, in the retail broker world. The criticism from the retail industry was loud and persistent; it would mean “the end of the retail FX industry in the US”; the nation would “lose ground to offshore centres with lighter regulation”; and customers would be fleeced by “unlicensed offshore brokers”.

Now, we are being treated to a cacophony of noise from the crypto world, arguing that the SEC’s approach to crypto regulation is too strict, risks the US losing its position in the world order, and would mean more clients going to unregulated offshore firms – it all sounds very familiar.

Back in the mid-2000s the retail FX world was very “wild west” and dodgy firms proliferated, forcing clients unfairly out of their positions with iffy margin calls and providing them with little or no real information. In crypto the latter is very much not the case of course, but for all the chatter of institutionalisation, it remains a retail – at best high net worth – market. Yes, there are some HFT-types playing, but they are largely acting as market makers because, as is often the case in retail, there is more “dumb” flow there than in the more professional markets.

In 2010 I was very much against Gensler’s views on OTC derivatives and the need for all trading to be on exchanges, but I was more ambivalent about the retail FX rules. Roll forward 13 years and you have to say that the US retail FX industry is probably one of, if not the best, markets globally for the retail FX trader.

The desire for the institutionalisation of crypto has also, ironically given how the reaction to events was to buy Bitcoin, probably been harmed by the banking crisis.

Some of the arguments I have read from crypto firms have been about how the regulations will not attract more traditional investing institutions to the asset class, but this seems wrong to me. These institutions are only going to come to crypto if it is better regulated, especially around how assets are held, and if major players’ financial health is subject to improved transparency.

This desire for the institutionalisation of crypto has also, ironically given how the reaction to events was to buy Bitcoin, probably been harmed by the banking crisis. Forget that it started with a bank targeting crypto institutions, the fact is there has been a scare in the banking industry and that in turn has unnerved the regulators.

More scrutiny of the banking sector is the consequence of any upheaval, normally followed by tighter rules as lessons are learned, is this really the environment to promote greater mainstream banking of crypto assets? Are the regulators really going to add to the risks they allow banks to take in this environment? Certainly, the noises emanating from the Basel Committee would suggest not.

Proponents of crypto say new providers will step in and fill the void left by banks, no doubt they will – but will they be trusted by real money given the events of the past year? Real money wants to deal with regulated and well-supervised institutions and the appropriateness of that regulation is a secondary consideration – often they just want to tick the box that says “we deal with institutions regulated in a major jurisdiction”.

So while crypto assets have made a good comeback price-wise, there are still doubts over what exactly is driving it, especially given the apparent ease with which these markets can be manipulated.

Crypto is still widely seen as a retail-dominated world, and this means the US will inevitably regulate it, probably with a heavy hand

In the bigger picture we seem to be in a stand-off situation. The banks are going to be very reluctant to over-commit to building a crypto business – witness BNY Mellon CEO Robin Vince’s comments last week on growing its digital assets business, “that’s not been a business strategy of ours to grow that aggressively”, – unless the clients push for it. Likewise, the clients are waiting for the banks to commit so they can deal with regulated institutions – and they are unlikely to go to newer firms given recent events.

Whether they like it or not, crypto is still widely seen as a retail-dominated world, and like it even less crypto-fanatics, this means the US will inevitably regulate it, probably with a heavy hand. The good news is that the US retail FX industry did lose some firms in the wake of the CFTC-imposed changes, but those that remained were strong, largely treated their customers fairly, and provided what is probably the safest local market for retail FX punters, hence, it could be argued, the market is a better place for the rules.

The better news is that if they see what they consider a well-regulated industry evolve out of this change, the institutions – and by association the banks – are going to be more open to entering the market in a meaningful way.

I still think the “end-game”, such as it is, in crypto, is yet to play out and I remain an advocate of digital assets, some of the technology behind it and especially tokenisation. Bitcoin I am more ambivalent about, but even that will benefit from what is perceived to be a “safer” environment. So, instead of potentially being the most dangerous man, it could just be that is 10 years’ time we will look back and see Gary Gensler as a catalyst for a bigger, and better crypto industry in the US at least – and I never thought I would write that!

colin@thefullfx.com