At the time, the shadow banking system that McCulley described was largely involved in products like derivatives and complex securitized assets, as well as others. Although much of that activity was addressed by the 2010 Dodd Frank Act, there’s now a concern that that behavior may show up in other places, including cryptocurrency, Hockett said.
Hockett compared the market to mortgage-backed securities, a derivative product that bundled residential mortgages and contributed to the 2008 crash. Right now, cryptocurrency markets match the popularity of mortgage-backed securities in 1999 or 2000 — a “bit player” but growing rapidly, he said.
“If the pace is the same, then it would seem to me that within three to four years we’re going to be looking at possible systemic danger,” Hockett said. “It might end up happening faster than that because in some ways, crypto seems to be spreading faster than [mortgage-backed securities].”
Disclosure is key
Thomas Chippas, CEO of ErisX, called the U.K. ban unfair. He said it holds cryptocurrency products to a different standard from other complex investment vehicles. ErisX offers bitcoin futures, although the company is unlikely to be directly impacted by the ban because its U.K. customers are institutional investors, Chippas said in an interview.
“I think disclosure is always a much better approach than outright banning,” Chippas told CQ Roll Call, adding that there’s ample data available about cryptocurrencies underlying the derivatives — and in some ways it’s more extensive than the information available about other commodities.