Will America’s crypto frenzy end in disaster?

“GET your $TRUMP now,” came the message from America’s president-elect three days before his inauguration. The commander-in-chief’s meme cryptocurrency, the aggregate value of which has so far peaked at almost US$15 billion, is far from the only sign of the administration’s ardour for digital assets. One new government department (Doge) has been christened after another meme coin. It is now quicker to list people close to the president who do not have significant financial interests in crypto than those who do. For anyone not paying attention, an executive order on Jan 23 made things clear: digital assets, it announced, would play “a crucial role in innovation and economic development in the United States, as well as our nation’s international leadership”.

What does this spectacular merger of hype cycle and national governance mean for American finance? The Biden administration had worked hard to prevent the crypto industry from infiltrating Wall Street. Tight rules made it prohibitively expensive for banks to hold digital assets on behalf of clients, and stopped them from pioneering their own crypto products, such as Stablecoins (tokens pegged to the dollar or other assets). The Federal Deposit Insurance Corporation (FDIC), a watchdog, obstructed dozens of such projects on the basis that it did not know how digital assets ought to be treated in regulatory filings. Now, on many issues, banks and the crypto industry are pushing in the same direction, and face little resistance. Expect, as a consequence, new and enormously profitable forms of risk-taking to emerge. In time, there will also be furious debates when digital upstarts, who have the full favour of the White House, come to clash with veterans of American banking.

Diamond days for diamond hands

The cryptofication of mainstream finance is already under way. On Jan 21, Travis Hill, interim chair of the FDIC, declared that he wanted regulation of crypto to be more transparent, and that all law-abiding customers should have access to bank accounts. Crypto advocates are hopeful the new administration will bring an end to “debanking” (when someone is denied or loses access to banking services owing to legal concerns). The industry has been particularly vulnerable to this because of fears about money laundering. Then on Jan 23 the Securities and Exchange Commission, America’s main financial regulator, altered its guidance so that financial institutions no longer have to account, on their own balance sheets, for crypto assets held on behalf of customers.