$=€=Bitcoin?

Bitcoin (and other virtual currencies) have the potential to revolutionize the way that payments are processed, but only if they become ubiquitous. This Article argues that if virtual currencies are used at that scale, it would pose threats to the stability of the financial system—threats that have been largely unexplored to date. Such threats will arise because the ability of a virtual currency to function as money is very fragile—Bitcoin can remain money only for so long as people have confidence that bitcoins will be readily accepted by others as a means of payment. Unlike the U.S. dollar, which is backed by both a national government and a central bank, and the euro, which is at least backed by a central bank, there is no institution that can shore up confidence in Bitcoin (or any other virtual currency) in the event of a panic. This Article explores some regulatory measures that could help address the systemic risks posed by virtual currencies, but argues that the best way to contain those risks is for regulated institutions to out-compete virtual currencies by offering better payment services, thus consigning virtual currencies to a niche role in the economy. This Article therefore concludes by exploring how the distributed ledger technology pioneered by Bitcoin could be adapted to allow regulated entities to provide vastly more efficient payment services for sovereign currency-denominated transactions, while at the same time seeking to avoid concentrating the provision of those payment services within “too big to fail” banks

The \u27Merge\u27 did not Fix Ethereum

The Ethereum blockchain that facilitates much of the crypto world last month finally accomplished the long-promised and oft-delayed “Merge”, a technical switch in the way it works

Beware the Proposed US Crypto Regulation— It May be a Trojan Horse

Following the spectacular failure of crypto exchange FTX International, there have been renewed calls for crypto legislation (including from the industry itself).But many of the proposals so far would be worse than the status quo — at least for the general public. Crypto firms such as FTX were involved in drafting many of the mooted US bills. The exchange’s implosion should not become a pretext for rushing these into law

Regulatory Innovation and Permission to Fail: The Case of Suptech

The recent U.S. Supreme Court decision West Virginia v. EPA has cast a pall over the discretion of administrative agencies at a very inopportune time. The private sector is currently adopting new technologies at a rapid pace, and as regulated industries become more technologically complex, administrative agencies must innovate technological tools of their own in order to keep up. Agencies will increasingly struggle to do their jobs without that innovation, but the private sector is afforded something that is both critical to the innovation process, and often denied to administrative agencies: “permission to fail.” Without some grace for the inevitable stumbles that come with developing new technological solutions, regulatory agencies will increasingly be unable to discharge their statutory mandates, resulting in failures of in-action that could harm the public interest. To illustrate this point, this Article uses “suptech” case studies drawn from the world of financial regulation. After articulating both the necessity and pitfalls of suptech, this Article argues that we need to extend permission to fail to administrative agencies when similar failures are recognized as a necessary part of the private sector innovation process. This Article argues that “permission to fail” cannot be a purely legal construct, and so it seeks to spur an interdisciplinary debate about how to construct both law and public opinion in a way that allows the regulatory state to develop the technological tools it needs to respond to technological developments in regulated industries

Regulatory Managerialism Inaction: A Case Study of Bank Regulation and Climate Change

In November of 2029, Hurricane Penelope struck New York City as a category two storm. Work had started on a wall to protect Manhattan from rising sea levels and storm surges, but the work was incomplete, and significant damage to Manhattan real estate was sustained. While almost all that real estate was insured, insurance companies were compromised by the sheer magnitude of the losses. Even with significant federal subsidies, they were unable to meet their full commitments on insurance policies. Some commercial real estate firms, who had never really recovered from the shift to remote working during the Covid pandemic, decided to cut their losses and file for bankruptcy. Banks with outstanding loans to these firms were left to foreclose upon the damaged properties. At the same time, given their own difficulties, many insurance companies were drawing down revolving lines of credit from their banks. Many of these insurance companies also refused to renew policies, undercutting the value of the foreclosed properties

Sandbox Boundaries

Around the world, subnational and national regulatory sandboxes are being adopted in an effort to promote fintech innovation. These regulatory sandboxes seek to achieve this by rolling back some of the consumer protection and prudential regulations that would otherwise apply to the firms trialing their financial products and services in the sandbox. While sacrificing such protections in order to promote innovation is problematic, such sacrifice may nonetheless be justifiable if, by working with innovators in the sandbox, regulators are educated about new technologies in a way that enhances their ability to effectively promote consumer protection and financial stability in other contexts. However, the market for fintech products and services transcends national and subnational borders, and this Essay predicts that as competition amongst countries for fintech business intensifies, the phenomena of regulatory arbitrage, race to the bottom, and coordination problems are likely to drive the regulatory sandbox model towards further deregulation, and disincentivize vital information sharing amongst financial regulators about new technologies. By examining the case studies of the regulatory sandboxes adopted by Arizona and the Consumer Financial Protection Bureau, as well as the proposals for transnational cooperation in the form of the Global Financial Innovation Network, this Essay suggests reason to be pessimistic about the prognosis for regulatory sandboxes in general, and information sharing across sandbox boundaries in particular

DeFi: Shadow Banking 2.0?

The growth of so-called “shadow banking” was a significant contributor to the financial crisis of 2008, which had huge social costs that we still grapple with today. Our financial regulatory system still hasn’t fully figured out how to address the risks of the derivatives, securitizations, and money market mutual funds that comprised Shadow Banking 1.0, but we’re already facing the prospect o fShadow Banking 2.0in the form of decentralized finance, or “DeFi.” DeFi’s proponents speak of a future where sending money is as easy as sending a photograph–but money is not the same as a photograph. The stakes are much higher when money is involved, and if DeFiis permitted to develop without any regulatory intervention, it will magnify the tendencies towards heightened leverage, rigidity, and runs that characterized Shadow Banking 1.0. Fortunately, though, there is still time to prevent DeFi from becoming Shadow Banking 2.0. This Essay argues for precautionary regulation of DeFi, designed to limit its growth and to cordon off whatever remains from the established financial system and real-world economy. While proponents of DeFi will contend that this will limit innovation, this Essay argues that DeFi innovation has limited benefits for society. DeFi doesn’t aspire to provide new financial products and services–it simply aspires to provide existing financial products and services in a decentralized way (meaning, without intermediaries). This Essay will demonstrate that the DeFi ecosystem is in fact full of intermediaries and explain why full disintermediation of financial services is an entirely unrealistic aspiration. This Essay will then proceed from that finding to argue that if DeFi cannot deliver on decentralization, regulators should feel emboldened toclamp down on DeFi in order to protect the stability of our financial system and broader economy