As we've learned the hard way, social media has become a viral force for pandemic-scale political conspiracies. Of course, it's not the media themselves that do this; instead, it's the rage many Americans harbor against governmental institutions profitably enabled by social-media colossi.
It's thus unsurprising that companies such as Facebook, which grew to omnipotence fueled by social anger, understand better than establishment financial institutions that economic anger is also growing at an ever more feverish pitch. As a result, what I'll call viral finance is spreading through every corner of the once staid banking, payment and investing infrastructure.
Crafting a new-age financial regulatory framework thus requires a keen understanding not only of how crypto assets work, but also why they work so seductively for the millions now putting their life savings at risk not because they don't know better, but because they can't do better any other way.
As most clearly voiced in the meme-stock frenzy, rage against financial institutions is generally directed at "Wall Street." Crypto assets and the fast-growing decentralized (DeFi) infrastructure are also at least as much about circumventing those deemed to control finance for their own benefit as it is about innovation, inclusion, or any of the other attributes advocates often espouse.
But there's an even more compelling motive behind new-age finance than anger: Desperation. The current savings rate at an insured depository is 0.06 percent. With inflation now hitting at least 5.3 percent, anyone without significant assets still hoping to save for the future has no choice but to gamble in the stock market or speculate with crypto assets.
Securities and Exchange Commission Chairman Gensler has prioritized reforms to trading platforms that make investors pawns, not the kings they fancy themselves to be in a video-game-like battle against bigness. However, U.S. bank regulators have so far taken no action to address the risks crypto assets pose to vulnerable consumers. A "sprint" is now underway to target crypto in general and stablecoins in particular, but the hard fact of this urgent matter is that the activity most likely to persuade investors to undertake crypto asset strategies are the investment, lending and trading activities most likely to attract vulnerable consumers. Although they are relatively poorer than most other groups, Black consumers are at least twice as likely as whites to hold crypto assets, with 61 percent of "marginalized" households saying that they are interested in crypto assets because traditional finance doesn’t work for them.
But, despite the need for urgent consumer protections, the regulatory sprint faces very high hurdles given the anachronistic definitions of deposit-taking, payment services and lending, on which their rules must rest. There are some steps the agencies can, and I think will, take. Indeed, they've already taken a big one in a little-noticed proposal demanding that any entity with which a bank does crypto-like business abides by bank safety-and-soundness and consumer-protection standards. U.S. agencies will also quickly act after global regulators finalize proposed, tough capital standards for higher-risk crypto asset exposures.
These are worthwhile efforts, but they will prove limited at best. The premise is that banks still hold the key to the most lucrative corners of the financial system. This is already wrong when it comes to many forms of lending, critical payment services and more, even deposit-taking. DeFi also aims at breaking the entire edifice of traditional financial intermediation and could well succeed in remarkably short order.
New law is thus already overdue to protect vulnerable investors, savers, payers, payees, and borrowers. Reforms along the lines of what a U.K. regulator recently proposed are also essential to ensure that social-media financial messaging is far more truthful than any of the rest. We know it's damaging when social media persuades Americans not to get a COVID shot, but it will prove at least as risky if this message also entices those with scant resources to part with them in hopes of what are almost always illusory gains.
However, new rules and even new law will achieve limited risk reduction as long as the fundamental force driving savers and investors into despair — and then to anger — remains unaddressed. Things won't change unless and until the Fed begins to recalibrate interest rates to favor average savers, not high-wealth investors.
When no one can save for the future, even those who shouldn't will speculate when they encounter someone who is ready to take their money and promises riches to come. They have no choice.
Karen Petrou is managing partner at Federal Financial Analytics, Inc. She is author of “Engine of Inequality: The Fed and the Future of Wealth in America”.