Is the Crypto Threat to U.S. Financial Stability $889 Billion or $10 Trillion?

 

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Is the Crypto Threat to U.S. Financial Stability $889 Billion or $10 Trillion?

By Pam Martens and Russ Martens: June 23, 2022 ~

Yesterday, Benzinga reported on a curious statement made by Fed Chair Jerome Powell during his appearance before the Senate Banking Committee on Wednesday. Powell was asked by Senator Kyrsten Sinema (D-AZ) if the Fed had been tracking the events in the crypto markets in the past several weeks. Powell responded that the Fed was watching those events “very carefully” but the Fed “did not see significant macro-economic implications.” The article goes on to lend credence to this observation from the Fed by noting the following:

“It is important to note the entire cryptocurrency market cap is $889.25 billion versus the American GDP, which is $25.34 trillion, and an equities market that controls more than $49 trillion.”

Before we drill down into the weeds of that crypto market cap figure, it’s important to note that former Fed Chair Alan Greenspan told Congress that he saw no major economic threat coming from subprime debt. In October 2008, as much of Wall Street and the U.S. economy lay in ruins from subprime debt bombs and related derivatives, Greenspan testified to a House Committee that “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief.”

Seriously? The most corrupt industry in America for more than a century and the head of the U.S. central bank thinks it’s an altruistic protector of shareholders’ interests?

The Fed and fellow Wall Street regulators appear to have made the same mistake today with crypto. As large financial institutions have entangled themselves deeper and deeper into all things crypto, federal regulators have been studying the problem rather than taking action.

So exactly how big is the problem? The $889.25 billion market cap for crypto cited by Benzinga is a miniscule part of the problem. That’s just the market value of all of the crypto that trades. And it should be noted that the market cap of crypto stood at $2.7 trillion as of last November, so investors have already experienced a negative wealth effect of $1.8 trillion.

But what about all of the crypto mining stocks that went public and have now lost 70 to 90 percent of investors’ money? What about the loans taken out by the crypto mining companies to buy all of that energy-guzzling computer equipment? What about the billions of dollars in margin loans sitting at federally-insured banks that were made to hedge funds to leverage their crypto bets? What about the bank loans to venture capital firms to invest in hundreds of crypto startup firms?

Estimates are that the real size of the crypto market is more in the range of $10 trillion. Anyone who thinks that a market of that size can implode without “significant macro-economic implications” is likely not an economist. (Unfortunately, Jerome Powell, the head of the monetary policy setting institution in the United States has a law degree, not an economics degree. And not to put too fine a point on it, but Powell was dead wrong on inflation being transitory and we’re all paying a steep price for that botched forecast.)

Another potential negative wealth effect may come from investors who bought cryptocurrency on their credit card and are watching the value of their crypto collapse while the interest rate on their credit card balance soars as a result of the Fed’s rate hikes. LendEdu reports that its survey showed that “18.15% of Bitcoin investors answered ‘I used a credit card to fund and purchase.’ ”

If you are gasping for breath at the news that U.S. regulators have actually allowed cryptocurrencies (variously called “rat poison squared” and a Ponzi scheme by very smart people) to be purchased on credit cards, you might want to sit down and put aside any cup of hot liquid in your hand while we fill in the rest of the details.

Over the past few days, we have been emailing some of the major providers of credit cards to find out if they allow their card members to purchase crypto on their credit cards. (We did that because crypto exchange, Coinmama.com, shows a Mastercard and a Visa emblem directly below the “Buy” button on their website. The crypto exchange, Binance, also prominently features Mastercard and Visa and says this: “At Binance, you can buy crypto with everyday fees using a VISA or Mastercard credit card. Alternatively, Binance also provides crypto purchases via bank transfer, fiat deposit, and e-wallet.”) 

Here are the answers we have received thus far from the credit card companies:

Mastercard responded as follows: “Mastercard is working with over 60 crypto leading wallets and platforms. We continue to launch a range of products and services with these players, including the 24 crypto card programs that have been publicly announced. Consumers can buy crypto using their Mastercard card to instantly convert their crypto holding into fiat and spend wherever Mastercard is accepted at more than 90 million merchants worldwide. Only fiat currency enters Mastercard’s network. Mastercard is leading in innovation through programs like our recent partnership with Nexo and the launch of the Gemini Card with a simple mission — to deliver people new and one-of-a-kind choices in how they pay and to make crypto more accessible across the ecosystem. We also have partnerships with Bakkt and Uphold to make crypto card spend more accessible. You can learn more about our programs here and here.”

American Express told us this: “In line with industry practice, today we don’t allow our cardmembers to purchase crypto using their credit card, as much as we wouldn’t allow them to buy stocks. We see decentralized crypto, like Bitcoin, still largely an asset to store value, rather than a good or service. As the space evolves, we will continue to monitor it and to pursue parity. We are, however, working with partners to help them launch payments products on our network. For example, Abra just launched the Abra Crypto Card on the American Express network. This card transacts in U.S. dollars, and offers cryptocurrency as rewards. We are not the issuer, rather, facilitating their U.S. dollar transactions in our capacity as a payments network, while extending some of the unique American Express benefits to their customers.”

The entanglements at Visa with crypto are so mind-numbing that you’ll have to read it for yourself.

Capital One shared this: “Capital One does not enable consumers to purchase cryptocurrencies by borrowing on their Capital One credit cards. Consumers can, however, purchase cryptocurrencies via their debit cards and direct ACH transactions with their Capital One 360 checking accounts.”

Chase, part of JPMorgan Chase, told us this: “We decline crypto purchases on credit cards.”

Adding to the insanity of allowing cryptocurrencies (many of which are backed by nothing) to continue to make major encroachments into the U.S. financial system, the Fed has taken no action, other than to say it’s studying the problem. On November 23 of last year, the Fed, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) released a joint statement on crypto which said this:

“Throughout 2022, the agencies plan to provide greater clarity on whether certain activities related to crypto-assets conducted by banking organizations are legally permissible, and expectations for safety and soundness, consumer protection, and compliance with existing laws and regulations related to:

• • Crypto-asset safekeeping and traditional custody services.
  • Ancillary custody services.
  • Facilitation of customer purchases and sales of crypto-assets.
  • Loans collateralized by crypto-assets.
  • Issuance and distribution of stablecoins.
  • Activities involving the holding of crypto-assets on balance sheet.”

Citigroup, the bank holding company which received the largest bailout in U.S. banking history during and after the 2008 financial crash, apparently isn’t waiting to find out from its regulators what’s legal and what’s not legal.

According to a press release yesterday at Business Wire, Citigroup has selected Metaco “to develop a platform to enable clients to store and settle digital assets seamlessly and securely. Citi intends to fully integrate METACO’s bank-grade digital asset custody and orchestration platform, Harmonize, into its existing infrastructure, to develop and pilot digital asset custody capabilities.”

Citigroup’s exposure to risky derivatives and subprime debt instruments collapsed its stock price during the 2008 financial crash. Its stock traded at 99 cents in early 2009. Beginning in December 2007 and lasting through at least June of 2010, Citigroup received the following in bailouts: $2.5 trillion in secret cumulative loans from the Federal Reserve; $45 billion in capital injections from the U.S. Treasury; the Federal government guaranteed over $300 billion of Citigroup’s assets; the Federal Deposit Insurance Corporation (FDIC) guaranteed $5.75 billion of its senior unsecured debt and $26 billion of its commercial paper and interbank deposits.

Citigroup has apparently received a warning from the SEC that if it builds a crypto platform and begins to act as a custodian for cryptocurrencies, it’s going to impact its balance sheet – which means that the Fed will also have to require it to hold more capital against risky assets. Citigroup reported the following on its quarterly filing (10-Q) with the SEC for the quarter ending March 31, 2022:

“In March 2022, the SEC issued Staff Accounting Bulletin (SAB) No. 121, which expresses the views of the SEC staff regarding the accounting for obligations to safeguard crypto-assets an entity holds for platform users. Specifically, the guidance requires issuers that hold digital assets for their platform users to recognize a liability for their obligation to safeguard the digital assets held and a corresponding asset, measured initially and subsequently at fair value. The guidance is effective for interim and annual periods ending after June 15, 2022, with retrospective application to the beginning of the fiscal year, with early adoption permitted. Citi is currently assessing the application of SAB 121, but based on its current activity does not expect any impact to its results of operations as a result of adopting SAB 121.”

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