In a new speech at the SNB-CIF Conference on Cryptoassets and Financial Innovation in Switzerland, Fed Governor Christopher Waller says that regulations for digital assets will ultimately be demanded by investors as they continue to suffer heavy losses.
“From a social perspective, there is another possible outcome when losses become widespread: those losses become practically, politically or morally intolerable. When everyday investors start losing their life savings, for no reason except wanting to participate in a hot market, demands for collective action can mount quickly.
History shows that there will be demands to make individual investors ‘whole’ by socializing their individual losses. We saw it just a few weeks ago after what can only be described as a run on the Terra ecosystem, when everyday users were seeking restitution and even experienced DeFi players were discussing ways to compensate retail investors.”
According to Wallace, new and innovative financial technology will often be regulated at the request of the public when negative industry-wide events happen that cause unavoidable losses to the average investor. He says regulation of the sector wouldn’t be to protect the rich, but society in general.
“This leads us to the main reason, in my view, that society wants to regulate new and poorly understood markets for financial products. It’s not to protect high-net-worth investors but to protect society from the often-irresistible pressure to socialize the losses of investors with limited resources, and to limit the spread of financial stress.
The desire for a backstop can emerge even in an isolated failure – to say nothing of a systemwide event – when uncertainty or private information moves stress from one asset class to others. By definition, those financial externalities – which central banks, including the Fed, monitor closely – can create losses that innocent parties never signed up for and couldn’t have controlled.
