Recent months have seen cryptocurrencies dominate the news, from former President Trump’s ambition to position the United States as “the crypto capital of the world” to the progression of crypto and stablecoin legislation in Congress. This surge in attention is complemented by substantial initiatives aimed at deregulating the crypto industry, paving the way for cryptocurrencies to challenge traditional financial systems. Advocates argue that these regulatory changes foster innovation and bolster U.S. leadership in digital assets, while critics express concerns about regulatory capture and potential conflicts of interest. Despite these heated discussions, the dialogue has largely been led by industry insiders and investors, leaving the average person largely uninformed. As cryptocurrencies integrate into banking systems, retirement plans, and local infrastructures, everyday Americans may find themselves impacted by these policies and the consequences of a rapidly evolving, minimally regulated financial landscape.
Discussion on Crypto Risks
In the latest episode of the TechTank podcast, co-host Nicol Turner Lee engages with Tonantzin Carmona, a fellow at the Brookings Metro program, to delve into these risks and her recent report titled “Protecting the American Public from Crypto Risks and Harms.”
CO-HOST NICOL TURNER LEE [00:00:00] Welcome to Tech Tank, a bi-weekly podcast from the Brookings Institution that explores significant technology issues of our time. From algorithmic bias to the future of work, Tech Tank unpacks complex ideas for broader understanding. I’m Nicol Turner Lee, co-host and senior fellow in governance studies at the Brookings Institution. I want to express my gratitude to our listeners for tuning into our discussions on pressing technology policy matters. We appreciate your interest in unpacking complicated topics with us. Today’s episode is no exception, as we examine President Trump’s pledge to make the U.S. the leading nation in cryptocurrency, alongside the recent legislative developments surrounding crypto and stablecoins. We will discuss how these headlines are combined with significant deregulation efforts in the sector, which some believe can enable innovation and maintain the U.S. position in the digital asset space. However, these discussions have primarily been steered by industry leaders and investors, often excluding the general public from the conversation. Although cryptocurrencies may seem remote to those who don’t engage in trading, researchers warn that millions of Americans might be affected as crypto permeates into banks, retirement plans, and local infrastructures. My colleague Judy and I recently released a piece on blockchain technology for public good, which you can find in the Tech Tank newsletter. Today, we’re focusing on the deregulated tools in the cryptocurrency space. I’m joined by Tonantzin Carmona, a fellow in the Brookings Metro Program who specializes in wealth inequality and emerging financial technologies. Tonantzin has valuable experience from her time on the White House National Economic Council and has authored the report “Protecting the American Public from Crypto Risks and Harms,” currently available on the Brookings website. Tonantzin, welcome to the show.
GUEST TONANTZIN CARMONA [00:04:09] Thank you for having me. I’m thrilled to be here. I appreciate the opportunity, especially after my time at the Treasury Department and now being back at Brookings. Your interest in my report has prompted this discussion, and I’m eager to share insights. We’re observing an evolution in crypto, especially with the attention it’s receiving from the president. Given your background in the Biden-Harris administration, I’m curious about how the current discourse around fintech has shifted.
GUEST TONANTZIN CARMONA [00:04:09] Absolutely, we’re seeing extensive media coverage of crypto due to its emergence as a significant political and regulatory topic. There has been a surge of federal actions from both the administration and Congress. For example, the Trump administration initiated executive orders to establish a strategic Bitcoin reserve and formed the president’s working group on digital assets. Concurrently, Congress is advancing crucial crypto legislation, including bills aimed at regulating stablecoins—cryptocurrencies pegged to stable values—and another that seeks to reform oversight of the broader crypto market. Additionally, controversies surrounding the president’s personal crypto initiatives, including a high-profile dinner with major investors in a meme coin, have sparked media scrutiny and raised concerns about conflicts of interest and potential corruption. However, the current discourse is noticeably louder and different from when I was in the Biden administration, where the approach was more cautious and risk-focused, especially following the FTX collapse. At that time, regulatory bodies like the SEC were actively pursuing enforcement actions to protect investors, while the Treasury prioritized responsible innovation. In contrast, the Trump administration appears to be rolling back many of the regulatory safeguards that were put in place after previous crypto scandals. Federal enforcement agencies that previously targeted crypto fraud are now being restructured or defunded, and the SEC has paused its lawsuits against crypto firms. Meanwhile, banking regulators are easing restrictions on how banks can engage with crypto, and the Department of Labor has rescinded guidance on crypto risks in retirement plans, dismantling many of the protections established to ensure market stability and investor security.
Understanding Cryptocurrency
CO-HOST NICOL TURNER LEE [00:07:07] I appreciate your insights on these changes. As someone involved in the CFTC Technology Advisory Board, I’ve engaged with various aspects of crypto and DeFi. However, I must admit that I still grapple with the concept of cryptocurrency. Could you provide a clear explanation for our audience about what crypto entails, especially regarding its nature as an asset?
GUEST TONANTZIN CARMONA [00:08:14] Certainly! The term “crypto” broadly refers to digital assets that utilize blockchain technology—a decentralized ledger system. The value of cryptocurrencies is essentially derived from code and public perception. For instance, Bitcoin and Ethereum are two well-known cryptocurrencies, while stablecoins are designed to maintain a stable value, often pegged to traditional currencies like the dollar. Although stablecoins can exhibit volatility, they are generally less susceptible to drastic value changes compared to other cryptocurrencies.
CO-HOST NICOL TURNER LEE [00:09:36] That’s a helpful explanation. It’s essential for our audience to understand that we’re discussing a distinctive financial market that operates under its own rules, often without adequate regulation. This lack of oversight likely contributes to the urgency of your report. Can you elaborate on your motivations for writing it and the current context surrounding these issues?
GUEST TONANTZIN CARMONA [00:10:23] I began researching crypto back in 2021, prior to the FTX collapse, driven by curiosity about this growing phenomenon. As I explored the crypto landscape, I encountered a troubling prevalence of scams, fraud, and market manipulation, alongside serious risks to financial stability and national security. Given the current legislative environment and the rapid advance of crypto legislation through Congress, I felt compelled to revisit this topic. The rollback of regulatory protections and the increasing influence of the crypto industry on the political process raised critical questions about the interests guiding these proposals. For instance, are we developing policies that prioritize long-term public safety, or are we catering to short-term industry goals? I find that the complexity of financial regulation often alienates the public, making these important discussions seem out of reach. My aim with this report is to translate the risks associated with crypto into more understandable terms, so that individuals can comprehend how these decisions directly impact their lives. History has taught us that when financial policies overlook safeguards, it is usually everyday Americans who bear the consequences.
The Impact of Cryptocurrency on Everyday Americans
CO-HOST NICOL TURNER LEE [00:12:47] Your report highlights a crucial point: many individuals feel disconnected from the cryptocurrency conversation, even though it is becoming increasingly relevant. As fintech continues to evolve, how are everyday people impacted by the lack of regulatory guidance in the crypto marketplace?
GUEST TONANTZIN CARMONA [00:13:53] One of the key messages of my report is that you don’t need to actively invest in or engage with cryptocurrency for it to influence your life. Crypto is already infiltrating banks, retirement savings, energy bills, and even scams. For example, some 401(k) plans and state pensions are now exposed to cryptocurrencies, despite their notorious volatility. These fluctuations pose significant risks to workers’ long-term savings and the stability of retirement systems. Additionally, as crypto firms venture into traditional banking and promote stablecoins, the potential for instability increases when these assets lose their pegged value. Such events can have severe repercussions not only for those directly involved in crypto but also for individuals who have never touched it, particularly if taxpayer-funded bailouts become necessary. Furthermore, crypto scams cost Americans upwards of $9 billion annually, with older adults being particularly vulnerable. Beyond scams, there are also ransomware attacks targeting public institutions, including schools and hospitals, often linked to cryptocurrencies. Reports indicate over 2,300 attacks on schools and local governments, underscoring the urgent need for more data on the relationship between crypto and cybercrime. Additionally, Bitcoin mining raises environmental concerns and contributes to higher energy costs for certain communities, further compounding the risks associated with crypto.
CO-HOST NICOL TURNER LEE [00:16:40] Recently, the DOJ announced a $225 million fraud scheme linked to misleading investment platforms. Given the current lack of regulatory oversight, do you anticipate an uptick in these types of fraud cases as cryptocurrency becomes more appealing to the general public?
GUEST TONANTZIN CARMONA [00:17:25] It’s certainly a possibility. As crypto gains traction and appears to receive government approval, more individuals may be drawn to it. This trend mirrors what we saw before the FTX collapse when various local leaders promoted crypto initiatives in their cities, often leading to failed projects and lost funds. The lack of stringent regulations could create an environment where more people, especially vulnerable populations, are exploited. Scammers employ various tactics, including impersonating government officials or utilizing romantic schemes to manipulate individuals into investing in fraudulent platforms. To mitigate these risks, we need to prioritize strong safeguards in any forthcoming proposals.
Enhancing Crypto Literacy
CO-HOST NICOL TURNER LEE [00:19:40] Your report underscores the importance of financial literacy in navigating the cryptocurrency landscape. How can we enhance understanding among everyday people about the risks and realities of this marketplace?
GUEST TONANTZIN CARMONA [00:20:30] While financial and tech literacy are crucial, they cannot replace the need for robust regulation. Individuals should not be expected to navigate an under-regulated industry on their own. The most vulnerable populations often lack a financial cushion, making them particularly susceptible to exploitation. Therefore, it’s not solely about education; it’s also about access and the responsibility of policymakers to implement meaningful protections. Reliable information sources are essential, and we need to address the proliferation of financial influencers on platforms like TikTok, who often promote risky investments without accountability. Furthermore, we must raise awareness across generations about the potential dangers that exist in the crypto space. To ensure consumer protection, we need strict regulations, including disclosure requirements, conflict of interest rules, and strengthening enforcement agencies.
Concerns About Bitcoin Mining
CO-HOST NICOL TURNER LEE [00:22:43] Your report also delves into the often-overlooked issue of Bitcoin mining. Can you elaborate on the implications of this practice for communities?
GUEST TONANTZIN CARMONA [00:23:48] Certainly! Bitcoin mining operations are large facilities filled with computers performing calculations to process transactions and earn Bitcoin. These operations consume significant amounts of energy and can strain local power grids. Many communities that have welcomed these facilities have noted minimal long-term economic benefits, such as job creation or tax revenue. In Texas, for instance, Bitcoin mines have contributed to a 5% increase in residential energy bills, costing consumers around $1.8 billion annually. Additionally, residents near these mines report health issues related to noise pollution from the cooling systems required to maintain the equipment. Many localities are struggling to regulate these operations due to emerging “right to mine” laws that restrict local government oversight, leading to increased community discontent.
Exploring Financial Inclusion Through Cryptocurrency
CO-HOST NICOL TURNER LEE [00:26:47] The discussion around cryptocurrency can be particularly relevant for historically marginalized communities seeking access to financial resources. How do you view the potential benefits and risks of cryptocurrency for these populations?
GUEST TONANTZIN CARMONA [00:29:18] It’s understandable that individuals from historically excluded communities seek alternatives to traditional financial systems. However, while cryptocurrency may seem like a solution, it is crucial to recognize that it doesn’t inherently provide a safer option. Many advocates portray crypto as a remedy for systemic exclusion, suggesting that investing early can help bridge the wealth gap. Yet, this perspective overlooks the fact that the wealth gap is rooted in generations of policies that have systematically blocked access to wealth-building opportunities. Furthermore, relying on speculative assets like cryptocurrencies can be particularly dangerous for individuals without generational wealth. The concept of predatory inclusion emerges here, where marginalized communities gain access to financial tools that come with risks and little consumer protection. For instance, subprime mortgage loans were promoted as pathways to homeownership but ultimately caused significant harm to communities of color. Cryptocurrency presents similar risks, promising access to new financial instruments while exposing users to substantial volatility without adequate safeguards. Retail investors, particularly first-time entrants, often suffer the most significant losses when the market crashes, while larger players benefit from the volatility. This dynamic leads to wealth transfer rather than wealth creation, exacerbating existing inequalities.
Legislative Developments and Future Directions
CO-HOST NICOL TURNER LEE [00:33:47] As we wrap up, I’d like your insights on the recent legislative developments, particularly the Genius Act and its implications for the stablecoin market.
GUEST TONANTZIN CARMONA [00:37:54] The Senate passed the Genius Act, which aims to regulate stablecoins, with a vote of 68 to 30. This bill now awaits consideration in the House, where lawmakers are deliberating a competing proposal, the Stable Act. There’s also a possibility of combining stablecoin legislation with broader crypto market structure proposals into a comprehensive package. While the Genius Act reflects a sense of urgency to act, it raises concerns about the potential risks associated with expanding the stablecoin market from $200 billion to possibly $2 trillion. This growth could embed stablecoins more deeply into our financial system and allow large tech companies to enter the banking sector through stablecoin issuance. This shift threatens the longstanding U.S. policy of separating banking and commerce, which has historically protected our economy from excessive concentration of power. If major companies like Meta or Amazon were to issue stablecoins, it could fundamentally alter the way people transact, potentially giving these corporations unprecedented control over finances and data. Moreover, the backing of these stablecoins, typically held in treasury securities, poses risks of market instability during periods of panic selling, which could have far-reaching repercussions for the global economy and financial stability.
Concluding Thoughts
CO-HOST NICOL TURNER LEE [00:41:35] It seems we are witnessing a significant shift in the financial landscape with the rise of cryptocurrency. The implications of these developments are profound, particularly as they relate to regulatory oversight and consumer protection. As we conclude, could you share your thoughts on how artificial intelligence might further complicate this landscape?
GUEST TONANTZIN CARMONA [00:42:13] I approach this topic with caution. While I’m not against innovation, I advocate for accountability in the tech space. The public often bears the consequences when things go awry, making it imperative for policymakers and researchers to remain vigilant, ask critical questions, and implement safeguards that prioritize public interest.
CO-HOST NICOL TURNER LEE [00:42:49] Thank you for sharing your insights today. Your expertise adds immense value to our understanding of the complex interplay between technology and finance. I look forward to having you back on the show. For our listeners, don’t forget to check out Tonantzin Carmona’s report, “Protecting the American Public from Crypto Risks and Harms,” which is available on the Brookings website. Thank you for joining us today as we explore significant research and findings related to technology policy. Your feedback is important to us, so please share your thoughts on this episode and what topics you’d like us to cover in the future. Thank you for your continued support of the Tech Tank podcast. This concludes another enlightening episode where we break down complex ideas into accessible discussions. Until next time, thank you for listening.
