Former FDIC Chair Comes Out Squarely Against Banning Bitcoin, Cryptos

Instead of banning Bitcoin and other cryptos, regulators should look at parts of the space that are the most likely to be vulnerable to manipulation, says former FDIC chair.

As regulators in countries around the world grapple with the proliferation of Bitcoin and other cryptos, some are taking the easy way out and opting to just ban them all together.

However, that’s not the way to go, according to one observer whose word carries clout due to her previous finance role.

Sheila Bair spoke on the issues this week to CNBC. She is a former chair of the U.S. Federal Deposit Insurance Corporation, or FDIC. She said this week that there is definitely need for regulations in the crypto space, however, there were areas that needed more attention than others.

Preventing futures contracts’ manipulation

One of the areas she thinks is in need of regulation regards the futures contracts from the Cboe and the CME Group. Launched in December, these contracts had been widely anticipated because of the boost in money that was expected to come into the space from institutions.

We told you in October about Wall Street players who’d voiced concerns about the types of manipulation that could be at play with these contracts. For example, Joe Saluzzi, a principal at Themis Trading, said practices like spoofing and layering are forms of manipulation that could haunt these contracts.

With such kinds of manipulation being possible, Bair said these contracts were ripe for regulations. Bair said:

“The Cboe and CME could help because they could give a window into providing more reporting from underlying Bitcoin exchanges that are feeding prices into their futures products. That can give the [U.S. Commodity Futures Trading Commission] a window into information, making sure there is no manipulation going on.”

Margins

In addition to the possible manipulation of the new futures contracts, Bair sees margin requirements for these futures products as another area in need of regulation. She said:

“When you worry about asset bubbles, from a regulatory perspective, one of the first things you want to look at is how much leverage is feeding into the investment demand.”

Bair acknowledged that the new futures products have some amount of margin available, which brings up leverage issues.

Leverage is another area ripe for regulation, Bair said, noting that the margin requirements are typically set very high.

“[The market] has been so volatile; they may want to up those. The may not want to permit leverage.”

As it stands now, margins are typically set in line with the volatility and liquidity profile of the product.  CME notes that it has the ability for clearing members to impose trading or exposure limits on their clients.  Other tools may include increased capital or margin requirements in cases where exposures increase beyond reasonable levels.

When all is said and done, Bair said that one of the most important issues entailed getting people to understand these new-fangled assets before investing in them. She said:

“We don’t ban assets. Where does that stop?”