WASHINGTON, Jan 22 (Reuters Breakingviews) - Wariness is passé on Wall Street. Cautious uncertainty over lingering inflation and geopolitical turbulence have been replaced by giddiness over the deregulatory bonanza financial firms expect President Donald Trump’s administration to deliver. Banks and investment firms are hoping for official blessing for cryptocurrencies and diluted bank capital rules. That could seed a future crisis which current regulations are intended to prevent. American taxpayers would then face calls to stem the contagion with their own funds, just as they did in 2008.
Much of the enthusiasm stems from promises that Trump-appointed regulators will take a more hands-off approach to novel financial instruments, especially in the broader cryptocurrency industry. Crypto industry heavyweights Andreessen Horowitz, Ripple and Coinbase Global (COIN.O), opens new tab, among many others, bet big on Republican candidates in the 2024 elections, flooding federal-level contests with around $200 million in contributions.
The payoff could be huge. Congress, including the now-Republican-controlled Senate, is crammed full of crypto-friendly legislators eager to institute a friendly regulatory regime for exchanges, investors and other institutions dabbling in digital currencies. To do so, they’re likely to grant authority to the Commodity Futures Trading Commission to regulate tokens as commodities. It’s a legal framework that proponents prefer over treating crypto like securities and granting jurisdiction to the Securities and Exchange Commission, which has been the industry’s nemesis during President Joe Biden’s administration.
Regulatory relief may arrive even before Congress enacts crypto legislation. The industry’s top foe in recent years, SEC Chairman Gary Gensler, stepped down before Trump’s inauguration on Monday. His nominated replacement, Paul Atkins, is an eminent Republican who is sympathetic to the crypto industry’s complaint that it has been unfairly targeted by Gensler’s enforcement division, which levied $8.2 billion of fines in the fiscal year that ended in September 2024, mostly on crypto firms.
Big banks eager to dabble in digital money will have to wait for changes to supervisory practices to feel confident, opens new tab doing so. In their regular assessments of bank health, supervisors have marked down lenders for doing business with some crypto firms. This has prompted crypto token issuers and venture capitalists to accuse federal regulators of “debanking, opens new tab” some crypto companies. Yet while some of these complaints may correctly point to overzealous supervisors, watchdogs also had legitimate concerns about fraud, exemplified by revelations of malfeasance at FTX, the crypto exchange which collapsed in 2022.
Still, a lighter touch is coming. Trump allies like venture capitalist Marc Andreessen and Tesla (TSLA.O), opens new tab boss Elon Musk have repeatedly raised the issue of debanking. Investigations into the issue by Congressional Republicans are likely to accelerate in 2025. The prospect of bank supervisors being fired, bullied or intimidated for flagging legitimate risks poses a major danger for the future of sound banking. Trump has his own vested interests to account for: he recently introduced a crypto coin of his own, which legal scholars have panned as a blatant attempt to profit from the presidency.
Bank regulators start the second Trump era on the defensive. The drawn-out process for finalizing international capital standards known as Basel III Endgame must go back to step one. The Federal Reserve’s point man for the regulatory framework, Vice Chair Michael Barr, is vacating his post at the end of February. Megabanks like JPMorgan (JPM.N), opens new tab and Bank of America (BAC.N), opens new tab face a reprieve on higher capital standards they felt were unnecessary, freeing up surplus funds for lending and payouts to shareholders. This also raises the risk of regulatory fragmentation with other jurisdictions, especially in Europe. While some sort of compromise may emerge, there will be little rush with Trump in control of appointing top financial regulators.
Banks are keeping their finger on the trigger when it comes suing their regulators, too. The American Bankers Association and related groups of megabanks filed a preliminary lawsuit, opens new tab late last year to ensure that the Fed’s revised stress test standards are in line with lenders’ desires. Suing the central bank remains a rarity, and Chairman Jerome Powell and the banks themselves remain more interested in resolving the issue through traditional regulatory processes. Other agencies like the Federal Deposit Insurance Corporation and the Consumer Financial Protection Bureau will have new, more bank-friendly leaders, at the very least.
The question is how much further the deregulatory push goes. Trump allies — including Musk — have advocated eliminating or combining bodies, opens new tab like the FDIC and CFPB. Gutting agencies, particularly their enforcement and supervision divisions, will allow bad actors to flourish and their activities to go undetected. As regulated financial institutions develop tighter connections with under-regulated sectors like crypto, as well as other potential problem areas like private credit, systemic risk could flourish – just as regulators dilute more stringent capital requirements that could absorb shocks in a downturn.
The prospect of banks socializing risks while keeping profits for shareholders is hardly a distant memory. The FDIC had to step in with a guarantee on all deposits, opens new tab – including uninsured ones – when Silicon Valley Bank collapsed in 2023. It reminded investors that, in a crisis, regulators will use all tools at their disposal to prevent further contagion – despite promising an end to such bailouts after 2008.
While FDIC guarantees are paid for by banks’ payments and not directly by taxpayers, some in the crypto industry are essentially asking for a permanent bailout fund, or at the very least a backstop, in the form of a bitcoin reserve, modelled on the U.S. strategic petroleum stockpile. The more that cryptocurrencies creep onto bank balance sheets and into investors’ portfolios, the greater the public pressure on the U.S. government to step in if the price crashes.
Some of the post-crisis financial regulatory reforms, and the overall structure of U.S. bank oversight, may deserve some rethinking nearly two decades since the crisis. More clarity around cryptocurrencies, an increasingly mainstream financial product, make sense. But with encouragement from ideological and financial opportunists, the U.S. risks recreating major gaps in its financial stability framework that could, once again, lead to disaster down the road.
