How will crypto clearinghouses evolve?

That is the topic of my latest Bloomberg column, here is one excerpt:

The upshot is that there is a tendency for members of a clearinghouse to either a) fail to meet standards and go bust, or b) join or least collude with a dominant coalition.

And:

You could also argue that a dominant clearinghouse might be good for crypto. The history of banking includes dominant or semi-dominant clearinghouses stabilizing markets and helping to introduce innovations, for instance of timeliness and transparency. The collusive monopoly might take too big a share of the market surplus for itself, but it has an incentive to keep the market up and running and profitable. That is hardly the worst arrangement crypto might stumble upon.

It is also true that a dominant clearinghouse is much easier to regulate, and indeed modern central banks often sprung out of these earlier clearinghouse arrangements. Sooner or later, there is a tendency for the law to intervene and turn the dominant private clearinghouse into part of a more formalized central bank. It is no accident that member banks of the Fed are still called “stockholders.”

One complication is that Binance is not a US firm; incorporated in China, it is now based in Dubai. Regulators might hope an American or at least Western version of Binance comes along, perhaps to create a new market duopoly. Arguably that is what regulators were hoping all along for FTX, so at least one version of the previous plan now has a huge hole in it. All the more pressure will be placed on Coinbase (a US firm), which may gain business but face a heavier regulatory burden and be expected to play a more specific role in the system.

When guessing at the future of crypto, keep in mind that the future of crypto exchanges and the future of crypto assets are very different things. For many pure crypto bugs, the exchanges are a sellout and a concession to older methods of finance and settlement. The exchanges can be regulated, controlled and co-opted, even turned against the notion of individual monetary sovereignty. Instead, the pure crypto vision stresses the notion of “every person their own bank,” through the medium of a personal wallet and beyond easy purview of the central authorities.

We should all be rereading Charles Goodhart…