Rob Nichols is the president and CEO of the American Bankers Association and Dennis Kelleher is president and CEO of Better Markets, a Washington-based nonprofit that promotes financial markets reform.
The recent turmoil in the trillion-dollar crypto sector, including FTX’s sudden liquidity crisis and spectacular collapse, has updated the concept of a bank run — made famous in movies like “It’s a Wonderful Life” and “Mary Poppins.” But this time, the run hasn’t been on a bank at all.
Instead, many crypto-asset customers had accounts at nonbank crypto firms. When they ran (that is, when they simultaneously rushed to make large-scale withdrawals), the customers found their withdrawals slowed and then frozen by the firms in a desperate attempt to remain solvent. Customers were forced to watch helplessly as their accounts plummeted to zero. This is very similar to what happened at nonbank financial firms during the 2008 financial crash and would have happened when the 2020 pandemic hit if the Fed had not acted so quickly.
The recent bankruptcies of crypto lenders Voyager and Celsius — and at the algorithmic stablecoin TerraUSD — make the risks of nonbanks painfully clear for the consumers who lost billions in uninsured crypto accounts and investors who have lost trillions of dollars. And now, the largely unregulated nonbank FTX, which had multiple crypto business activities spanning the globe, saw $6 billion in withdrawals in 72 hours and has collapsed entirely amid the potential for law enforcement and congressional investigations.
The 2008 financial crash and the 2020 pandemic-caused crisis already proved that nonbanks are not mere fringe players in our global financial system; they are critically important and deeply interconnected to the banking system and economy and can threaten financial stability. And they are growing in importance: nonbank financial intermediation (sometimes called “shadow banking”) accounts for nearly half of $470 trillion in global financial assets, according to the Financial Stability Board’s most recent report.
More recently, the growth of the trillion-dollar crypto sector — with its many asset types, exchanges and wallets, intersecting with mainstream finance in a number of ways — has created a whole new field of unregulated nonbank players.
Our organizations don’t always agree on banking policy. But today, as the warning lights blink on the economic dashboard and we confront both persistent inflation and the risk of a recession in the months ahead, we both agree that crypto companies and other nonbanks pose a significant and increasing risk to our financial system that needs to be better understood and regulated.
The critical overriding principle to getting the shadow banking system on safer ground is this: apply the same regulatory standards to the same products and services, regardless of origin or the technology involved.
Americans should know that when they engage in…
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