UNSTABLE THOUGHTS ON THE ECONOMY

QUESTIONING THE STABILITY IN STABLECOIN

Last fall, acting Director of the Consumer Financial Protection Bureau (CFPB), Russel Vought, announced that the CFPB will no longer be bringing any enforcement actions. This is a technical way of saying that the regulatory body he oversees will cease carrying out the mission it was designed and built to achieve.

What was that, by the way? Born out of the 2008 financial recession and the Wall Street Reform Act, the CFPB was empowered to detect and root out abuses in the consumer financial market industry. Since then, it has successfully cracked down on payday lenders, mortgage companies, and other shady market participants. It has done so to the tune of tens of billions of dollars.

However, following Vought’s declaration, the momentum and good work that this organization manufactured has been brought to a halt. The CFPB has terminated roughly half of all actions since the new administration took over under President Donald Trump. These included serious cases against major players in the industry that many Americans have a lot of experience with, like Zelle. Yet, the Bureau has also announced the termination of cases against lesser-known parties sporadically in recent weeks and months. The regulatory body also short-circuited existing orders against parties already in the vice grip of the American government, such as Apple and U.S. Bank (read: they let them off the hook). Additionally, the CFPB has signaled that it will no longer focus any attention at all on alternative financial products and markets. Rather, they will focus their attention on traditional areas of fraud in the financial industry with admittedly lesser resources and concentration.

Maybe we should expect this as just yet another example of a starvation campaign designed to kill a regulatory body that political establishment forces did not like from the start. However, industry experts disagree. In a joint comment letter, an interesting alliance (the American Bankers Association and the Community Bankers Association) voiced opposition to CFPB limiting its own authority and supervisory responsibilities. Rather, they urged the Bureau to utilize the broad authority given to it under the Dodd-Frank Act to identify any “risk to customers” and prosecute cases against entities that perpetrate such harms, especially on retail customers.

The presentment of a white flag by the CFPB comes at an interesting crossroads in American history. Modern technology has brought financial products into the hands of a whole new class of Americans seemingly overnight. With this profound sense of possibility, many jumped into the market like hordes of people rushing west for land in the 1800s. Reports suggest the number of customers investing in the stock market has risen by approximately ten percent over the last ten years. This can be partially attributed to new forms of market access placed right in the palm of your hand (i.e., Robinhood) to every customer, regardless of sophistication level or income level. We can be sure that many of these newly-christened stock traders, crypto holders, and other Gordon Gekko-wannabes have little of either.

The collision of the CFPB’s decisions and these trends suggests an ominous future when we look at other storms building on the horizon. Specifically, many financial and technology companies have recently announced plans to incorporate historically alternative financial products (like cryptocurrencies and complementary protocols) into their lineup of offerings to the general public. One such item that many are working to offer is called Stablecoin. This is a new breed of cryptocurrency (with a lot of the same problems as the old ones) but different in that it is constructed to hold a certain value, at least that is how they are being discussed and possibly marketed. Creators of these so-called stablecoins hope to deliver on that advertised-stability (it’s right in the name!) by tying it to something else, like fiat currency, other cryptocurrencies, commodities, or algorithms. The promise of stablecoin offers the speed and convenience of crypto (i.e., Bitcoin, Dogecoin, Ethereum, etc.) with the stability of traditional, fiat-backed currencies (i.e., United States Dollars, Euros, etc.).

Some of the biggest players in the financial and technology space have already signaled their intention to offer such products, including but not limited to Stripe, PayPal, Circle, and Tether. The interesting (and eventually disturbing) development here is the entrance into and imprimatur given by such well-respected players in the industry to a new and untested product. This is most easily and obviously seen through their insertion of the word stable into the coin’s name. Despite their best intentions, to be sure, they are letting a fox into every henhouse across America. How can you spot the wolf in sheep’s clothing here?

First, remember, these are derivative products and by their very nature prone to instability and manipulation belying the stability that’s injected into their names. If you cannot recall how much we should question the marketing and sale of these things (CDOs, MBSs) in general, please revisit the financial recession from almost twenty years ago. Relatedly, the underlying products they are derived from are historically and logically unstable. They fluctuate legitimately due to market forces—stocks go up and down. They also rise and fall because of corruption—pump and dump schemes or other garden-variety market collusion and impropriety. Watching a whole new class of unsophisticated customers being told that these are stable-coins is as surreal as hearing salesmen selling fixed waterbeds (the very thing beneath its surface belies its name and points to its contradiction and possible defects). What is this? A block of ice? It’s illogical to the point of insincerity. And remember, just because they promise you stability and put it in their name, doesn’t mean they can or will deliver on it. Funds, public companies, and exchange-traded financial products in general often miss their mark and don’t execute on their stated objective and we should look beyond their marketing to scrutinize their products and their underlying components to decide for ourselves objectively what they are offering and if they should be marketing it that way at all.

Second, security issues abound in stablecoins like any other crypto asset. Their issuers can be compromised by wrongdoers through hacking or other nefarious means, and they typically are. Their customers can be exploited via phishing or other attacks, and they frequently are. Where will these people run once their stablecoins flip out?

Third, aside from general market instability and historical manipulation pervasive in the financial industry, peculiar technological issues also poison the underlying stability promised to customers. Self-regulatory organizations like FINRA, which manages the broker-dealer profession, have been dealing with this problem for a long time. Algorithms (or algos as the tech bros call them) bust all the time. Their busts cause the American financial system and customers that are a part of it lots of time and money. It also forces regulatory and governmental actors to take their eyes off the real prize of targeting and catching serious financial criminals (including those using crypto to mask such crimes) to address these ever-present problems. Tech breaks all the time. Everyone that has ever used any kind of technology knows that. They will break here too, especially with their algos, and once they do, customers will have no recourse holding a stablecoin that is flipping out and losing value right in front of their eyes. One might wonder too how these problems will be put on steroids once institutional investors start trading stablecoins across all markets. Will these unstable coins poison every other coin we have in our collective piggy bank and the structure it all sits upon?

Possibly! We’ve noted historical, logical, marketing, technological, logistical and other problems that deconstruct any hope of stability in stablecoins. Also, following Vought’s pronouncement at the CFPB, there’s the disturbing reality awaiting misled customers once they discover there is no route to recovery. The force and effect on Main Street America could be devastating. Consider it was just a small segment of society trading toxic assets twenty years ago that brought our economy to a screeching halt and required everyday Americans to bail them out. But who will bail out Main Street once we all get in the game and place our hopes on these so-called stablecoins? For now, that’s why I’m against stablecoins. One might say I’m unstable, but after reading this, and my thoughts on the economy, aren’t you too?