What the government’s latest crypto report means for Bankman-Fried

By Sam Sutton and Kate Davidson

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The Financial Stability Oversight Council on Monday identified a list of regulatory gaps and systemic risks that could emerge if U.S. policymakers don’t get a handle on crypto regulation.

Federal agencies need to flex their authority to halt abuses, according to the council, whose members include the heads of independent banking and markets regulators.

What’s more, the council also recommended Congress pass legislation that would give regulators more power to oversee the digital asset businesses and projects — “decentralized” or not — that have created a $1 trillion industry whose products often resemble those offered by traditional financial institutions.

All of this is roughly consistent with what top officials like Treasury Secretary Janet Yellen and SEC Chair Gary Gensler have been saying for the better part of the last year — particularly after a market contagion sparked by the collapse of the TerraUSD stablecoin jeopardized the accounts of retail investors at billion-dollar brokerages and lending platforms.

There’s one section of the report that’s likely of considerable interest to the man who had positioned himself as the industry’s white knight while other businesses floundered. That, of course, is FTX founder and political megadonor Sam Bankman-Fried.

A little backstory first: FTX is seeking the Commodity Futures Trading Commission’s approval to let retail investors on its platform place highly leveraged bets on derivatives linked to crypto prices.

The crypto exchange’s plan would bypass the banks and brokerages that usually intermediate those trades. Just as importantly, it would also automatically liquidate an investor’s position once their collateral falls below a margin threshold that would be set around every 30 seconds, 24 hours a day, seven days a week.

Financial industry powerbrokers, including CME Group CEO Terry Duffy, have warned that FTX’s plan “is fraught with danger ” and could upend derivatives markets that energy and agriculture businesses use to hedge their risks.

While FSOC didn’t go that far — and didn’t cite FTX by name in this context — the report said these types of proposals have major risks that aren’t adequately addressed by current regulation.

The automatic liquidation of retail investors' positions — without intermediaries to absorb the shocks — could trigger cascading losses that would raise all sorts of investor and consumer protection issues, according to the report.

“Platforms dealing directly with retail investors would need to ensure the provision of adequate disclosures, responsibilities otherwise taken on by intermediaries,” he report said. “The vertically integrated model presents conflicts of interest that could result in incentives to liquidate customer positions.”

The council recommended that agencies, including the CFTC, assess “whether vertically integrated market structures can or should be accommodated under existing laws and regulations.” [Emphasis mine.]

That doesn’t mean that FTX’s proposal is dead in the water. But it does highlight how cautiously it’s being viewed by the council’s banking and market regulators — including CFTC Chair Rostin Behnam — who endorsed the report’s findings on Monday.

“It's a very positive step forward for FSOC,” Behnam said during the FSOC meeting. “We are going to collectively – the SEC and CFTC – work together to ensure that we use all of the existing enforcement authority we have until new authorities are provided. And I look forward to working with the council and Congress to make sure these gaps are filled as soon as possible.”

FTX did not respond to a request for comment.

IT’S TUESDAY — Our thoughts are still with everyone in Florida. What else should we be writing about? Send us your tips, story ideas, questions or feedback at kdavidson@politico.com and ssutton@politico.com.

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Americans are overwhelmingly happy with their bank, according to a new Morning Consult survey conducted on behalf of ABA. Consumers also trust banks more than other industries to keep their data safe, and they credit banks for doing more than other businesses to protect them from fraud. View the infographic to see more from the survey.

Cleveland Fed President Loretta Mester speaks about the payments system at 7:15 a.m. … Vice President Kamala Harris and Treasury Secretary Janet Yellen speak at Treasury’s Freedman’s Bank forum, which begins at 10 a.m. … Job openings and quits data released at 10 a.m. … Fed Governor Philip Jefferson speaks at 11:45 a.m. … San Francisco Fed President Mary Daly speaks to the Council on Foreign Relations at 1 p.m.

RAIMONDO PUSHBACK — The White House and Treasury Department have knocked down rumors of Secretary Janet Yellen’s post-mid-term departure, but the Revolving Door Project is still eager to push back on any suggestion that Commerce Secretary Gina Raimondo would be a potential Yellen successor.

In a press release the progressive group is set to issue this week, Executive Director Jeff Hauser accuses Raimondo of being anti-worker and beholden to big business interests, including hedge funds, and pharmaceutical and tech firms. The group will point to Raimondo’s decision to approve licenses for auto chips for Chinese firm Huawei this year, and to the campaign funds she received from big Wall Street donors when she ran for governor of Rhode Island.

“Promoting Gina Raimondo would contradict every part of Biden’s rightly celebrated economic achievements,” Hauser said in the release. “The only people who would benefit from a Raimondo Treasury are C-Suite executives and their cronies, including members of far-right group ALEC that praised her signature policy as Rhode Island Governor.”

GRUENBERG’S CLIMATE MESSAGE — Our Victoria Guida: “Acting FDIC Chair Martin Gruenberg on Monday urged smaller banks to explore new ways to manage risks from severe weather events due to climate change. Gruenberg, in a speech to the American Bankers Association, acknowledged that community bankers have successfully dealt with natural disasters in the past, such as by managing their exposure to flood plains. But he said those same strategies might be less viable going forward.”

CREDIT SUISSE WHIPSAW — Bloomberg’s Marion Halftermeyer and Myriam Balezou: “ Credit Suisse Group AG was plunged into fresh market turmoil after Chief Executive Officer Ulrich Koerner’s attempts to reassure employees and investors backfired, adding to uncertainty surrounding the bank. The stock, which had already more than halved this year before Monday’s selloff, fell as much as 12% to a record low before clawing back most of those losses and closing Zurich trading about 1% lower.”

But don’t freak, says Bloomberg columnist Paul J. Davies, who argued the company “is in a tight spot, but it isn’t “on the brink.”

On the other hand: Credit Suisse’s failure “would have widespread and largely unknown repercussions from the inconvenient to the possibly catastrophic,” says Better Markets CEO Dennis Kelleher, who blamed the Fed for “failure … to properly regulate the activities of foreign banks that have U.S.-based operations.”

ZELLE — Sen. Elizabeth Warren (D-Mass.) on Monday released a report claiming that the banking consortium behind the instant payments app Zelle might be violating federal laws and consumer rules. “New internal data from the big banks shows that their platform Zelle is rampant with fraud and theft, and few customers are getting refunded,” Warren said in a statement, adding that “despite their CEOs' promises to the Senate Banking Committee, JPMorgan and Wells Fargo have still not turned over complete data.”

Warren and other Democrats want banks to reimburse customers who’ve fraudulently induced into making payments on Zelle. The banking industry is dismissing Warren’s claims: “Today’s report from Sen. Warren fails to acknowledge that 99.9% of the 5 billion transactions processed on the Zelle network in the past 5 years were sent without any report of fraud or scams,” according to a joint statement from the American Bankers Association, Bank Policy Institute, Consumer Bankers Association and The Clearing House. “Expanding the current liability framework for banks, as the report suggests, would force Zelle providers to either scale back Zelle’s popular instant [peer-to-peer] services given the financial risk, possibly limit the instantaneous features or impose fees to recover their additional costs.”

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UN SLAMS FED OVER RATE HIKES — Victoria Guida again: A United Nations agency on Monday warned the Federal Reserve and other central banks that further increases in borrowing costs will do little to combat inflation and will instead inflict more pain on developing countries.

CLOSE TO FLAT— New York Fed President John Williams said he expects growth to be “close to flat” this year, in a speech in Phoenix, Bloomberg’s Matthew Boesler reported. “Tighter monetary policy has begun to cool demand and reduce inflationary pressures, but our job is not yet done,” he said. “It will take time, but I am fully confident we will return to a sustained period of price stability.”

A message from American Bankers Association:

U-TURN IN THE UK — Our Esther Webber, Eleni Courea and Tim Ross: “U.K. Chancellor Kwasi Kwarteng has junked his plan to cut taxes for high earners after a backlash from financial markets and Conservative Party colleagues that plunged his country into economic crisis. ‘We get it, and we have listened,’ Kwarteng said as he announced the dramatic U-turn on Twitter on Monday.”

STOCK HEAVY — WSJ’s Akana Otani: “U.S. families have trimmed their exposure to the stock market. But they still have a lot of their wealth concentrated in stocks, says Goldman Sachs. U.S. households have about 39% of their assets in equities.”

BUILDER BUST — WSJ’s Will Parker: “Big builders had a booming business during the pandemic selling to traditional buyers. But with mortgage interest rates pushing 7%, these buyers are disappearing from model home showrooms across the country.”

BREAK THE INTERNET — Our Declan Harty and Sam: "Kim Kardashian will pay $1.26 million to settle federal charges that she promoted a cryptocurrency without disclosing she was paid to do so, the Securities and Exchange Commission said Monday."

ANOTHER RISK? — Coindesk’s Helene Braun: “The rise of Circle’s USDC stablecoin — as opposed to the controversial tether (USDT) — is a threat to the broader financial system because it could increase the chance of run risks from smaller issuers, researchers at the Federal Reserve Bank of New York wrote in a new paper published Monday.”

Richard Ostrander has been named general counsel and head of the legal group at the New York Fed, and as part of the role will also serve as deputy general counsel of the Federal Open Market Committee. Ostrander is currently a managing director in legal and compliance at BlackRock. Before that, he served as managing director responsible for global legal coverage of Morgan Stanley’s fixed income division.

Brian Johnson has joined Patomak Global Partners as a managing director in its banking supervision and regulation group. Johnson was most recently a partner in Alston & Bird’s financial services and products group, and served previously as deputy director at the Consumer Financial Protection Bureau.

Usman Rahim is joining Bank of America’s public policy team as a senior VP. He previously was a financial services policy analyst for BGR and is a Treasury and Thom Tillis alum. (h/t Daniel Lippman)

Mike Lucier is now senior vice president at Height Capital Markets. He previously was deputy chief of staff and legislative director for Rep. Jennifer Wexton (D-Va.) and is a Don Beyer and Jim Moran alum.

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Oil prices jumped nearly $4 a barrel on Monday as OPEC+ considered reducing output by more than 1 million barrels per day (bpd) to buttress prices with what would be its biggest cut since the start of the Covid-19 pandemic. — Reuters’ Noah Browning

BlackRock has chosen a new chief financial officer as part of a reshuffle that positions the world’s largest asset manager to fight back against criticism and promotes younger executives. — FT’s Brooke Masters

A message from American Bankers Association:

Nine in 10 Americans are “very satisfied” or “satisfied” with their bank, according to a recent Morning Consult survey conducted on behalf of ABA. Other takeaways:

● Consumers trust banks to keep their data secure (49%) over Fintechs PayPal and Venmo (11%).
● A strong majority (82%) recognize that the financial services marketplace is “highly competitive” and 84% agree they have multiple options when it comes to bank accounts, loans and credit cards.
● Most consumers (89%) credit their bank for actively protecting them from fraud and scams.
● A majority (84%) agree that innovation and technology improvements by banks are making it easier for all Americans to have access to financial services.
● An overwhelming majority of consumers value the convenience of their credit card (94%) and appreciate their credit card rewards program (90%).

See what else consumers have to say about their banks: View the infographic.

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