Former FDIC Chair Argues against Banning Bitcoin

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Sheila Bair, former director of the U.S. Federal Deposit Insurance Corporation (FDIC), recently argued that bitcoin shouldn’t be banned because of its “lack of intrinsic value.” Instead, the government should ensure a well-informed market, free from fraud, manipulation. and speculation.

In an op-ed piece for Yahoo Finance, Bair initially pointed out that bitcoin is a bubble, given its meteoric rise this year, and that it’s hard for regulators to know what to do given that they “know people are going to lose a lot of money.” Disagreeing with the “ban bitcoin” rhetoric, she argued money has historically depended “more on psychology than physical attributes.”

She wrote:

“Since the beginning of commerce, humans have assigned value to things of no readily-apparent intrinsic worth. Particularly in the case of mediums of exchange, aka currency, we assign value simply because those with whom we transact do so as well.”

Citing historical examples where governments failed to maintain the value of their fiat currencies, she noted bitcoin’s value is partly derived from a lack of reliance on central bank backing, as some of the cryptocurrency’s investors may have “more faith in technology than in their government.”

Bair, who currently advises a number of fintech startups after heading the FDIC from 2006 to 2011, added that the bitcoin ecosystem has grown to a scale that belies attempts to label it worthless and that the promise of a peer-to-peer currency “has a strong allure.” She clarified that albeit the market is in a bubble, it shouldn’t be banned, just like the Netherlands didn’t ban tulips in the 17th century, or like the government didn’t ban tech stocks in the early 2000s.

Proposed government approach to bitcoin

Instead of banning bitcoin, Bair said governments should make sure their policies “don’t feed the frenzy,” so as to prevent the so-called speculative mania that’s driving bitcoin’s value up. She added:

“Government should also take steps to help ensure that the bitcoin price— wherever the market assigns it — is reflective of investors making informed decisions, free of fraud and manipulation, and that trading is not facilitating illicit activity.

Bair then mentioned what she believes were positive steps toward these objectives, specifically mentioning New York’s virtual currency licensure framework, also known as BitLicense. Moreover, she praised the Commodity Futures Trading Commission (CFTC) on its work pressing both CBOE and CME, the exchanges trading bitcoin futures, to institute information sharing with cryptocurrency exchanges. Per Bair, this will, in turn, help monitor fraud and market manipulation in the bitcoin market.

She then praised the Securities and Exchange Commission’s (SEC) work, proactively protecting investors against Initial Coin Offering (ICO) scams. She further argued that to prevent bad actors from using cryptocurrencies for illicit purposes, exchanges should be regulated. She said:

“Most bitcoin exchanges are not subject to the same level of regulation and reporting requirements applicable to banks to screen customers and detect and report suspected instances of illicit financing. They should be.”

At the end of the piece, she mentioned bitcoin isn’t the “first market mania, nor will it be the last.” As such, she urged investors not to put in more than they can afford to lose, to do their homework, and to keep in mind the cryptocurrency’s price can fall in a flash, citing the recent Christmas correction.

Featured image from Shutterstock.

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