Tag: Financial Crisis

SEC Chairman: AI May Lead to Next Financial Crisis

by Blockchain News

Securities and Exchange Commission (SEC) Chairman Gary Gensler has expressed significant concerns about the potential consequences of artificial intelligence (AI) on the financial system. In an interview with DealBook, Gensler outlined his views on how AI could become a systemic risk and the need for responsible regulation.

AI as a Transformational Technology with Risks

Gensler sees AI as a transformational technology set to impact business and society. He co-wrote a paper in 2020 on deep learning and financial stability, concluding that a few AI companies would build foundational models that many businesses would rely on. This concentration could deepen interconnections across the economic system, making a financial crash more likely.

Gensler expects that the United States will most likely end up with two or three foundational AI models, increasing “herding” behavior. “This technology will be the center of future crises, future financial crises,” Gensler said. “It has to do with this powerful set of economics around scale and networks.”

Concerns About Concentration and Regulation

The SEC chief’s warnings extend to the potential conflicts of interest in AI models. The rise of meme stocks and retail trading apps has highlighted the power of predictive algorithms. Gensler questions whether companies using AI to study investor behavior are prioritizing user interests.

“You’re not supposed to put the adviser ahead of the investor, you’re not supposed to put the broker ahead of the investor,” Gensler emphasized. In response, the SEC proposed a rule On July 26, 2023 requiring platforms to eliminate conflicts of interest in their technology. The SEC’s proposal was to address conflicts of interest arising from investment advisers and broker-dealers using predictive data analytics to interact with investors.

SEC Chairman Gary Gensler emphasized that the rules, if adopted, would protect investors from conflicts of interest, ensuring that firms do not place their interests ahead of investors’.

The proposal would require firms to analyze and eliminate or neutralize conflicts that may emerge from using predictive analytics. The rules also include provisions for maintaining records regarding compliance with these matters.

The question of legal liability for AI is also a matter of debate. Gensler believes companies should create safe mechanisms and that using a chatbot like ChatGPT does not delegate responsibility. “There are humans that build the models that set up parameters,” he stated, emphasizing the duty of care and loyalty under the law.

Balancing Innovation with Responsibility

Gensler’s insights serve as a timely reminder of the importance of balancing innovation with responsibility. As AI continues to transform various sectors, including the financial system, his warnings underscore the need for careful regulation, oversight, and ethical considerations.

The SEC’s focus on AI’s potential risks reflects a growing awareness of the need for a comprehensive approach to ensure that technology serves the interests of investors and the broader economy, rather than creating new vulnerabilities.

Image source: Shutterstock

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Bitcoin Liquidity Drops Despite Price Surge

by Blockchain News

Bitcoin (BTC) has seen a significant price surge of 45% in 2023, making it one of the best-performing assets in recent times. However, despite the bullish quarter in terms of price gain, BTC’s liquidity has dropped to a 10-month low. The liquidity dry-up is partly attributed to the ongoing financial crisis in the traditional financial market and regulatory actions against crypto companies.

The current financial crisis has caused several banks to collapse, which has directly impacted the crypto ecosystem. In particular, the collapse of crypto-friendly banks such as Silicon Valley Bank and Signature Bank has removed crucial U.S. dollar payment rails for crypto, leading to a liquidity crisis, especially on U.S. exchanges. This, in turn, has led to increased price volatility, forcing traders to pay more fees in slippage.

Slippage refers to the price difference between the expected price of a transaction and the price at which it is fully executed. For instance, for a $100,000 sell order, the slippage for the BTC/USD pair on Coinbase climbed by 2.5 times at the beginning of March. During the same time frame, Binance’s BTC/USDT pair’s slippage barely moved.

The liquidity crunch has also led to higher price volatility on U.S. exchanges, where the price discrepancy between BTC and U.S. dollar pairs has increased drastically compared with non-U.S. exchanges. For example, the price of BTC on Binance.US is more volatile than the average price across 10 other exchanges.

Conor Ryder, research head of on-chain data analytics firm Kaiko, explained the drastic impact of the liquidity crisis on traders and the market. He noted that stablecoins are replacing U.S. dollar pairs, and although it lessens the impact of U.S. banking troubles, it has an adverse effect on liquidity in the United States. He added that it would indirectly harm investors there.

Despite the regulatory actions taken against crypto companies, the price of Bitcoin has remained relatively strong, outperforming traditional assets such as stocks and bonds, which have seen one of their worst years. However, the liquidity crisis has undoubtedly impacted the market, and it remains to be seen how it will evolve in the coming months.

In conclusion, Bitcoin’s liquidity drop despite its price surge is a concerning development for traders and investors alike. The ongoing financial crisis and regulatory actions against crypto companies have led to a liquidity crunch, causing increased price volatility and higher fees for traders. As the market evolves, it will be interesting to see how BTC’s liquidity and price behave in response to the changing market conditions.

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“Deutsche Bank share slide fuels global banking fears”

by Blockchain News

The recent decline in Deutsche Bank’s share price has reignited concerns about the state of the global banking system and the possibility of a new financial crisis. As we have seen in the past, major commercial banks are deemed too big to fail, and governments will often bail them out to prevent widespread economic collapse. However, the mounting debt levels of the U.S. government and other countries are raising concerns that this time, the situation may be different.

While politicians may kick the can down the road when it comes to addressing unsustainable debt levels, the market is starting to feel the effects of this issue. The yo-yoing between interest rate hikes and quantitative easing programs by central banks is not designed to solve the systemic issue of government expenditure exceeding income. Instead, the Federal Reserve and U.S. Treasury are working to protect the dollar’s position as the global world reserve currency. This short-term solution may have long-term consequences, including the threat of hyperinflation.

As a result of these economic concerns, some investors are turning to alternative investments such as Bitcoin. The cryptocurrency has often been touted as a potential hedge against inflation due to its limited supply and decentralized nature. Despite criticism from some commentators, the recent rise in Bitcoin’s price suggests that the inflation hedge thesis may be back in play.

However, the relationship between Bitcoin and inflation is complex and difficult to predict. In 2021 and early 2022, inflation was on the rise, and Bitcoin’s price fell, leading many to dismiss the idea that Bitcoin could be an inflation hedge. But some members of the Bitcoin community, such as Steven Lubka, continued to hold this conviction. They argued that the inflation was due to systemic supply chain shocks caused by the pandemic and not monetary inflation. Therefore, the idea that Bitcoin could act as a lifeboat amid the devaluing of the U.S. dollar could still hold true.

Bitcoin’s price decline in the past was also partly due to the unwinding of fraud and leverage from certain players in the cryptocurrency market. As the market continues to mature, the value of Bitcoin as a hard money asset may become more apparent to investors.

In conclusion, the recent decline in Deutsche Bank’s share price highlights the fragility of the global banking system and the potential for a new financial crisis. While politicians and central banks may try to kick the can down the road, the mounting debt levels of governments and the threat of hyperinflation suggest that a historic economic correction may be looming. Some investors are turning to Bitcoin as a potential hedge against these risks, but the relationship between the cryptocurrency and inflation remains complex and difficult to predict.

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Top US Regulator Likens Cryptocurrency to ‘Fool’s Gold,’ Warns of Looming Financial Crisis

by Dailyhodl

Acting Comptroller of the Currency Michael J. Hsu is equating cryptocurrencies to fool’s gold and warns that the unregulated nature of the digital asset environment is reminiscent of what caused the 2008 financial crisis.

The Office of the Comptroller of the Currency (OCC) head also believes that innovation must be balanced with purpose and lessons learned from the past.

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Speaking at the Blockchain Association this week, Hsu says,

“I have seen one fool’s gold rush from up close in the lead-up to the 2008 financial crisis. It feels like we may be on the cusp of another with cryptocurrencies (crypto) and decentralized finance (DeFi).

The 2008 crisis holds lessons that can help industry and regulators chart a better path and avoid repeating the mistakes of the past.”

The OCC is an arm the United States Department of the Treasury. The organization’s stated mission is to ensure that “national banks and federal savings associations operate in a safe and sound manner… and comply with applicable laws and regulations.”

Hsu’s comments come amid a larger push by the government to regulate crypto. The U.S. Securities and Exchange Commission (SEC) is embroiled in a lawsuit against Ripple Labs, and SEC chair Gary Gensler says he believes crypto is innovative, but won’t last long without regulation.

Hsu concludes his remarks by advising,

“Financial innovation should be anchored in purpose. Be clear about the ‘why’ – not just clear about the problem that needs to be solved, but also why it is important to solve it. Just because something can be innovated, doesn’t mean it should.

‘We need to meet client demand for correlation,’ was a rationale I heard many times in the lead-up to the 2008 crisis. Meeting that demand created vulnerabilities in the financial system and amplified shocks.”

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Disclaimer: Opinions expressed at The Daily Hodl are not investment advice. Investors should do their due diligence before making any high-risk investments in Bitcoin, cryptocurrency or digital assets. Please be advised that your transfers and trades are at your own risk, and any loses you may incur are your responsibility. The Daily Hodl does not recommend the buying or selling of any cryptocurrencies or digital assets, nor is The Daily Hodl an investment advisor. Please note that The Daily Hodl participates in affiliate marketing.

Featured Image: Shutterstock/KhDuy Vo

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As China Sees Lehman Moment, Bitcoin Is A Godsend

by Bitcoin Magazine

The collapse of Evergrande and Chinese real estate developers underscores the promise of bitcoin, an asset disconnected from the global system.

The below is a direct excerpt of Marty’s Bent Issue #1080: “Nothing like the smell of credit risk contagion on a Monday morning.” Sign up for the newsletter here.

A few weeks ago we warned you freaks about the potential of a “canary in the coal mine” situation developing in China as one of the country’s largest real estate developers, Evergrande, seemed to be at the “acceleration” phase of a massive devaluation of their credit which markets began pricing-in in May of this year. Well, we congregate in this dark corner of the Internet today to make you freaks aware (if you aren’t already) that something has snapped. Evergrande is going under and it is dragging other large real estate developers in China down with it. The world is witnessing another Lehman moment, but this time it is emanating from China and not New York City.

As you can see from the chart above shared by Zerohedge, this contagion event in the Chinese real estate development market is beginning to call into question the value of Chinese sovereign debt as the price of 5-year credit default swaps skyrocketed this morning. Signaling to markets that investors are willing to pay high prices for default insurance as the likelihood of a contagion event in Chinese (and potentially global) credit markets seems inevitable at this point. Especially considering the fact that the CCP has come out and stated that they do not plan on backstopping the real estate developers who are currently plummeting toward bankruptcy. It will be interesting to see if they keep this posturing as things get worse.

If the below article from the WSJ is accurate in its description of the intentions of Xi’s CCP to “roll back China’s decades long evolution toward Western-style capitalism and put the country on a different path entirely” – a path more in line with Mao’s Communist China – then this implosion of the Chinese real estate development market may be the perfect boogeyman to lean into as Xi attempts to force the Chinese economy in that direction.

“Look at what capitalism has wrought. We need to better align ourselves with Chairman Mao’s philosophy now more than ever. The greedy capitalists have put us in a very precarious situation.”

We shall see if that framing comes to fruition. But before it does or doesn’t, we would like to highlight that this situation is not a product of unfettered capitalism, but a product of unfettered debt creation in a world that is already levered to the gills.

Anyone who has been paying attention to the Chinese real estate market over the last decade could have told you that it was a house of cards waiting to collapse. The existence of one ghost city, let alone dozens, is enough evidence to prove that there is a gaping dislocation between what the CCP and real estate developers were reporting from a growth perspective and reality. While there has been a ton of development activity over the last decade, it hasn’t been followed up with demand from consumers. On top of this, as things begin to crumble it is becoming apparent that Evergrande – and others – were engaged in the issuance of exotic debt instruments that were used to keep the music playing as long as possible. Luring average Chinese citizens into their over indebted operations with the promises of large paybacks.

The situation is a very hairy one and it is developing very quickly. We will find out just how bad it is in the coming weeks and months. We will also find out how exposed the Western world is to China’s economy via direct investments in these large real estate players, their debt instruments, and the debt issued by the CCP.

I can’t tell you how this will affect Bitcoin in the short to medium-term, but I can tell you that I am extremely thankful that Bitcoin exists in this type of environment. The ability to hold an asset that is completely disconnected from a global financial system built on paper promises is a godsend. Not only that, but when we transition to a global Bitcoin Standard it will be much harder to put the global economy in such a precarious situation as it will be impossible to issue the amount of debt the world is currently drowning in.

As always, we will keep you freaks abreast of the situation as it develops.

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‘Crypto will cause the next financial crisis’: Precious metals boss

by Cointelegraph

The CEO of precious metals royalty and streaming company Metalla Royalty & Streaming, Brett Heath has warned that crypto will “lead the charge into the next financial crisis.”

Metalla Royalty & Streaming is a Canadian-based firm founded in 1983 and has a current net worth of almost half a billion dollars. Metalla offers exposure to precious metals through gold and silver royalties and streams.

Speaking to financial news outlet Kitco News on May 28, Heath compared crypto to the tech induced crash of the early 2000s and the 2008 mortgage crisis, noting that:

“When you look back the last few decades and you look at all of the financial crises that happened, you know, they all have a couple of things in common. And one of them is the mass adoption of a new financial product or a new technology that’s not very well understood.”

“If we just rewind to the mortgage crisis of 2008 […] We had the mass adoption of mortgage-backed securities, collateralized debt obligations. And once the public had embraced this, this new financial product then it crashed, It was a huge problem,” he added.

The CEO described cryptocurrencies as a “license for the private sector to print money,” as he questioned the amount of liquidity that has been pumped into the market since the beginning of 2020.

Heath drew a comparison with the United States’ M1 — total liquid money in circulation — noting that since January 2020, the M1 has “increased by four and a half times.” According the Federal Reserve, the M1 went from $4,018 billion in January 2020, to around $18,935 billion as of April 2021. Heath emphasized that:

“That’s an extraordinary increase and it’s such a short period of time. But if you look at cryptocurrency using the total market cap of cryptocurrency, it’s over tenfold.”

Heath appears to hold concerns over systemic risk from mass investment into an asset class that he feels holds “no intrinsic value,” with the end result being a sell-off similar to the tech crisis of the early 2000s:

“When you have that amount of capital wiped out of digital wallets across the globe, you better believe there’s going to be some significant financial repercussions that are felt,” he said.

The precious metals proponent appears unfazed by predictions of Bitcoin surpassing gold as a store of value. He also questioned the notion that Bitcoin’s max supply of 21 million gives it scarcity or value, and pointed to other cryptocurrencies of lesser value that are backed by what he says is better technology:

“What about the other 10,000 cryptocurrency-related tokens and coins that exist today, many of which have better technology, better privacy, and use a ton of a lot less energy?”

“When there’s so much, what’s the value or what’s really that intrinsic value?” he added.