This piece originally appeared in FIN, James Ledbetter’s fintech newsletter.
Perhaps we were not paying the closest attention—shouldn’t-this-have-happened-months-ago?—to who would be nominated to head the Office of the Comptroller of the Currency (OCC), that backwater financial regulator that is part of Treasury and is impervious to reform because its statutory empowerment dates to the Civil War. The last we had dialed in, there was a pundit battle about whether President Biden would or should nominate former Treasury official Michael Barr versus Mehrsa Baradan, who is, among other things, the author of the vital book The Color of Money.
This week, Biden surprised a lot of people by nominating Saule Omarova, a singularly fascinating figure who is: a Cornell Law Professor; an accomplished scholar with a radical critique of the American financial system; a former lawyer at the white-shoe firm Davis Polk; and a former Treasury official in the George W. Bush Administration. Oh, and she was born in what is now Kazakhstan and was educated in Moscow.
Omarova as OCC chief would be a trifecta of identity politics: the first woman, the first person of color, the first person born outside the United States to grace the OCC throne. In the fintech and crypto worlds, however, people are freaking out. “Omarova is another Gary Gensler and possibly worse,” tweeted one crypto commentator. Reuters’ Breakingviews labeled her “a dubious choice.”
Why all the fear? Well, there is her proposal for a “people’s ledger” which does seem like it would eliminate banking as we’ve historically understood it. Omarova’s point of view about fintech and cryptocurrency might seem at first blush ludicrously broad, but it reflects a wariness about the stability of the overall financial system, clearly an overhang from the 2008 economic breakdown and ensuing Great Recession. Her perspective contrasts notably with most of SEC chief Gary Gensler’s public comments about crypto, which tend to focus on investor protection. Omarova is concerned that fintech and cryptocurrency accelerate already-existing threats to what she calls the “New Deal” framework of financial regulation, and indeed to the economy as a whole.
Her “New Deal” frame can be inadequately summarized like this: Forged in a crucible of global economic meltdown, the New Deal’s approach to financial markets was to strike a balance between market activity—consigned almost exclusively to the private sector—and public-sector responsibility for market stability (including backstops of last resort), and consumer protection (such as FDIC deposit guarantees) that propped the whole thing up. This structure, while fragile, was able to propel the US economy through the strife of the Depression and World War II to a period where sustained prosperity was at least theoretically possible.
The model, though, has been breaking down for decades (she doesn’t say so, but FIN would argue the 1971 closing of the gold window and subsequent breakdown of Bretton Woods was the first knockout blow). Omarova fear about systemic stability focuses more on developments in the ‘80s and ‘90s, emphasizing the development of derivatives and other ways of “synthesizing assets.” In her her 2019 paper in the Yale Journal on Regulation, Omarova categorizes the aspects of new financial products that made the system more unstable: pooling, layering, acceleration, and compression.
So: this is the lens through which Omarova views cryptocurrency and the blockchain. Almost everything that crypto advocates tout as a revolutionary breakthrough—more efficient transactions! decentralization!—she sees as a potential threat to global financial stability. Here is a crucial passage from testimony she delivered to the Senate in 2018:
If [blockchain technology] succeeds in making wholesale payments, clearing, and settlement instantaneous, easy, and cheap, it will enable potentially exponential growth in the volume and velocity of trading in securities and other financial assets. To put it simply, in a fully frictionless world of blockchain-powered transaction processing, overtly speculative trading will also be faster, easier, cheaper, and thus more voluminous.
It’s not quite Mo Money, Mo Problems, but it’s close.
How much, though, would Omarova’s academic opinions truly matter in a regulatory position that’s both modest and constrained? It’s important to remember that the OCC has effectively no jurisdiction over any important cryptocurrency producer or exchange. It’s also entirely possible that the Senate won’t approve Omarova’s nomination, although her Bush administration history might earn her some cred with a Senate Republican or two.
It would be dim-witted, though, for the fintech or crypto community to celebrate a shootdown of Omarova’s nomination as a meaningful victory. The day of reckoning between crypto/blockchain and the state is coming. It could be entirely authoritarian; China this week officially declared all cryptocurrency activity illegal. It could be more constructive; also this week, Britain’s Financial Control Authority announced it would work with the Bank of England to use blockchain technology to speed up regulatory reporting. Most likely it will be a mixed bag, but the path will be easier through thoughtful, experienced regulators like Omarova; instead of reflexive opposition, the fintech and crypto worlds should look for ways to engage her.
This piece originally appeared in FIN, James Ledbetter’s fintech newsletter. Ledbetter is Chief Content Officer of Clarim Media, which owns Techonomy.