What is the Dodd-Frank Act, and could it force the FDIC to take over Coinbase?
The recent partnership with BlackRock and Coinbase brought up this interesting question.
The 2009 banking crisis resulted in $700 Billion of taxpayer money given to large financial institutions who collapsed, in part from high risk investments.
In response, Congress created legislation to prevent the taxpayers from having to repeat that scenario, however, the legislation simply puts the burden on a different group of unsuspecting citizens.
Large financial institutions, including investment banks and insurance companies managing over $250B can be classified as SIFI (strategically important financial institutions).
This is the new name for “too big to fail” institutions.
In the event of a situation that would normally call for bankruptcy, a SIFI follows a different process.
The FDIC takes control of the SIFI, and creates a new bridge institution that is used to bring the collapsing company back to life (assets from old co. are transferred to new co.)
The FDIC is an insurance company that supervises state-chartered banks who are NOT members of the Federal Reserve System.
What does this have to do with Coinbase? I first learned about this scenario from Jim Rickards, which he refers to in his “ice-nine” thesis.
BlackRock is absolutely large enough for SIFI status, but does not currently have that designation from what I can tell.
However, if that were changed, and Coinbase was considered a part of BlackRock, this could impact Coinbase clients.
If BlackRock were a SIFI, and become insolvent, it would taken over by the FDIC.
The “bail-in” provision would be applied per the Dodd-Frank Act.
This means the FDIC could close the business temporarily, preventing anyone from selling their crypto and withdrawing it.
As part of the FDIC SIFI process, a new entity would be created. Coinbase depositors would get equity in this new business, and NOT their original funds or crypto.
This scenario recently happened with small banks in rural China that had liquidity problems because of the struggling real estate market.
Depositors rushed to the bank to withdraw their funds, and were given “investment product” instead of their money.
This is the “bail-in” scenario. The funds from from inside the institution, and not from outside (taxpayers).
Savvy crypto investors are aware of the risks around keeping funds on an exchange, however, the new BlackRock arrangement involves less knowledgable investors via 401Ks and mutual funds now using Coinbase exchange to buy crypto.
Keep an ear open for the term “bail-in” as this scenario may happen in other countries experiencing financial hardships.
Some of you may remember this from 2013 where it happened with Cyprus banks.