Christy Goldsmith Romero, an officer with the Commodity Futures Trading Commission (CFTC), said on October 26 that the collapse of the Terra ecosystem and its effects show how the contagion risks in crypto markets are similar to those that the traditional financial system faced during the Global Financial Crisis (GFC) in 2008.
In a speech that she delivered at the International Swaps and Derivatives Association‘s (ISDA) Crypto Forum, Romero made the suggestion that greater linkages between crypto markets and TradFi increases the danger that cryptocurrency may create for the general stability of the financial system.
“The digital asset market remains relatively small and contained from the level of systemic risk that would come with greater scale or interconnections with the traditional financial system. But this may not be the case in the near future, particularly given growing interest by traditional finance. “
Retirement and pension funds are an area of traditional finance that the Commissioner would prefer to keep separate from cryptocurrency. This point of view is probably influenced by recent events in the UK, where problems with pension funds forced the Bank of England to step in.
The global financial crisis was triggered when financial institutions started making risky loans to individuals that had the resources necessary to repay their mortgages in full. Before the defaults began to have a domino effect that was felt all over the globe, these “subprime” mortgages were packaged together and promoted as risk-free financial products.
It is commonly believed that the CFTC is the regulator that is more crypto-friendly when compared to the Securities and Exchange Commission (SEC). However, the CFTC appears to be attempting to change that image as part of its bid to gain more regulatory oversight after disclosing that it initiated 18 enforcement actions against the sector throughout the 2022 fiscal year. This was done in order to show that it was taking the sector more seriously.
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