On Wednesday, March 14th, the U.S. Senate voted to pare down many aspects of the so-called “Dodd-Frank” rules, legislation that was passed in the aftermath of the 2008 financial crisis to mitigate some of the gross abuses in the banking sector that incubated the crisis in the first place. If these revisions are passed in the House of Representatives, that begs the question: could a similar crisis be fomented again? If so, speculative assets would be hit hard, including crypto.
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Round and Round We Go …
This op-ed isn’t concerned with the wider argument of regulation versus deregulation, both in the cryptocurrency space and in the larger financial universe at large. Instead, it just focuses on what may come. And to understand the un-arrived, we first look at what could be bidding the arrival.
In the context of another financial crisis like the world saw in 2008, you may not need look any further than the U.S. Senate’s comfortable 67-31 vote passing of a good ol’ Dodd-Frank slim down.
One of the biggest talking points that came out of the story was along the lines of, My god, Republicans and Democrats actually overwhelmingly joined together on major legislation for the first time in recent memory.
Cynics, however, are simply regarding it as a testament that the only people really reaching across the aisle are donors and lobbyists from the banking sector. The (R) or (D) next to names matters little.
During the vote, the dissenters dissented, of course, because they see the writing on the wall: stripping down Dodd-Frank could lead to another runaway financial crisis down the road. A crisis wherein the responsible parties again remain largely unscathed and receive fat bonus checks courtesy of bailouts from everyday Americans.
If that happened, markets the world over would be adversely affected, to put it mildly.
Just Asking the Question, No Crash Necessarily Nigh
First off, the Senate’s revisions still have to be approved in the U.S House of Representatives after House Financial Services Committee Chairman Rep. Jeb Hensarling puts forth his own revisions of the bill. As an aside, you may recognize Rep. Hensarling as the congressman who presided over the House’s latest crypto hearing.
If the bill leaves the House alive, then President Trump would have the choice to sign it into law. To that end, CNN reports Trump is amenable to the bill in its current form, making his signature a likely one.
At that point, it could take years, even a decade or more, for problems to come to a head in a similar way as they did in 2008. It’s just a possibility that deserves scrutiny now that the Senate is jockeying to enact the most systemic changes to the banking sector that the U.S. has seen in 10 years.
This is all speculation for now, to be sure. Perhaps the lessening of Dodd-Frank will prove inconsequential to any future crashes. Though that seems highly unlikely.
How This Affects Crypto Users
Well, if history shows us anything, it’s that speculative assets get hit hard during periods of economic downturn. As Investopedia puts it rather surgically, “In a recessionary environment, the worst performing assets are highly leveraged, cyclical and speculative. In these conditions, risk is rejected.”
In other words, investors flee to safer, stabler ground. And as speculative of an asset class as it is for now, crypto shouldn’t be immune to this dynamic. A deep, prolonged cryptocurrency bear market could be possible in such a situation.
So how to proceed safely, then?
Your best bet is to have a “preventative” mindset — don’t wait for a crash of ’08 proportions to start figuring out how to react. Going forward, keep the corner of your eyes peeled on the political arena for legislative developments like the one discussed above as well as on global markets in general.
Simply put, don’t tune out everything that’s going on around you. If something bad is to come, there’s a good chance you might be able to correctly identify the signs beforehand and act accordingly.
With that said, in the cryptoverse, it’s never a bad time to get our ducks in a row. Our crypto ducks — or our CryptoKitties, as it were. So it wouldn’t be a bad idea to test how fast you can send your assets to an exchange in case you needed to cash out in the worst of the worst.
It’s worth considering, in the very least. I come not as a priest of FUD (“fear, uncertainty, doubt”), just a columnist with concerns.
What’s your take? What would you do if the wider economy — not the cryptoeconomy per se — crashed again? Sound off in the comments below.
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