4 Ways COVID-19 Will Bring Banks and Regulators to Crypto

The crypto community was remarkably prescient in its prognosis of how coronavirus was going to impact the global economy and society. Through the long months when political leaders and the World Health Organization (WHO) were reluctant to declare a global pandemic and take firm action, many well-known voices on Crypto Twitter, including @balajis, @naval, @twobitidiot and others, were predicting a repeat of Wuhan across the world.

The WHO declared the COVID-19 outbreak a pandemic almost three months after Crypto Twitter exploded in concern about Wuhan going into a full lockdown. In the U.K., where I live, Prime Minister Boris Johnson suggested Britain should take a different approach from the rest of the world and seek “herd immunity.” Crypto Twitter and Reddit challenged his claims vigorously. Such a stark difference between the dangerous nonchalance of the fiat world and the accurate prognosis of the crypto community says something about the mental makeup of people who’re drawn to crypto – curious, not satisfied with the status quo and more interested in possibility than in the current reality.

Historically, the journey of the crypto community through policy circles has not been easy. There has been a huge generation gap between the fearful Boomers that design markets and economies today, and often equally irrational bitcoin maximalists who dominate debate in the crypto community. In my own personal experience interacting with regulators around the world. Now, on-point, insightful voices like Chamath Palihapitiya and Balaji Srinivasan are finally being noticed in policy circles as providing a valuable perspective to challenge conventional wisdom and that simple shift will fundamentally change the discourse around crypto going forward.

Historically regulators around the world have been extremely cautious in allowing banks to touch cryptocurrencies. Even in Switzerland, where crypto banks like SEBA and Sygnum have seen some traction, and in Germany, where more than 40 banks have sought crypto custodian licenses, Basel capital requirementsfor holding cryptocurrencies have been prohibitive. There’s been a presumption the post-Basel III  (i.e. post-2009) banking system is functioning well and the issues of the last financial crisis have been addressed. That means banks must avoid unfamiliar and volatile asset classes like cryptocurrencies.

Now the COVID-19 bailout, and the repo crisis that preceded COVID-19, have shown that Basel III and IV did little more than shift systemic risk from the banking system to the shadow banking system. Everyone from Federal Reserve Chairman Jerome Powell to macro investing legends like Ray Dalio have been humbled by this entirely white swan event. This newfound humility will lead to a reexamining of our reliance on complex mathematics to hide mountains of debt and the magic word “scarcity” will be back in fashion again. When banks go looking for scarce assets for the sake of long term stability of their balance sheets, most will choose gold but a significant number will choose digital gold – i.e. bitcoin.

In March, a month before the U.K. economy locked down, the Bank of England released an exceptionally well crafted paper on the potential benefits of retail CBDC. As I wrote previously, retail CBDCs can have this “little guy bailout” feature of electronic payments systems built into them. Shortly thereafter, as if on a cue, several U.S. lawmakers tried hurriedly to include a digital dollar in the bailout bill. That measure, and others since, have failed, but suddenly a “digital dollar” is very much on the policy agenda.

Historically, one of the strongest policy arguments against a retail CBDC has been that banks are the primary instrument of credit and monetary policy. A CBDC available to households might undermine banks in a time of crisis. However, this crisis has shown the brick and mortar banking system is rather ineffective in serving its social purpose – which is to maintain financial stability and thus promote broader economic welfare.

U.K. Chancellor (finance minister) Rishi Sunak has struggled to deliver a bailout targeted at the little guy mainly because banks have failed to deliver the funds to the intended recipients. As the Guardian reported recently, only one in five U.K. businesses that have formally applied for government-backed loans have been granted emergency funding during the COVID-19 lockdown. Tragically, it appears the program may be too slow in getting money out fast enough to support struggling firms.

As we emerge from this lockdown in the next three to six months, it will be interesting to see if this inability of banks to bail out the little guy (or girl) will impose a direct political cost on politicians like Mr. Sunak and Mr. Johnson. If it does, one hopes that even opponents of retail CBDCs will give the idea strong consideration. Retail CBDCs always made sense and now the COVID crisis and the need to get people money quickly and directly has proved the case.

Historically, cryptocurrency regulation around the world has been characterized by an inconsistent patchwork of reactive, state by state and country by country rules. For an industry built around an asset class that is designed for instant, global, internet-based transfer, this has been a minefield to navigate. In Western Europe, where most nations are now transposing the fifth money laundering directive (5MLD) into law, licensing and registration requirements are coming into force in a country-by-country manner. For example, Spain doesn’t yet formally regulate cryptocurrencies, whereas Germany now formally characterizes cryptocurrencies as a financial instrument indicating the European Union’s MiFID rules might govern cryptocurrency markets sooner rather than later.

Then there are a number of minor and major country by country variations that require at least a PhD in Twitter law to navigate fully. This lack of regulatory harmonization might create interesting opportunities for some but it hurts the crypto industry as a whole by making it nearly impossible for innovators to scale crypto businesses globally. By bringing bitcoin and crypto assets firmly and positively into the policy and regulatory discourse, COVID-19 will sharply accelerate this drip feed of inconsistent regulation towards harmonized and integrated fiat and crypto markets.

Some experts like Caitlin Long, who has led the charge in Wyoming to create a favorable environment for the crypto industry, believe such a shift will bring more institutional money into crypto. I feel that while an institutional wall of money will benefit our industry, what’s more important is that the road to cross-border, peer-to-peer electronic money might now have become shorter. And COVID-19, as unfortunate as the pandemic is, might have this one big positive, digital side effect.