A thing of the past, the London Interbank Offered Rate (LIBOR), which served as the pacesetter for the financial sphere for over 40 years has been replaced by the Second Overnight Financing Rate in the United States. The decision to switch, which has taken around 11 years, speaks volumes about the scope for change in the financial realm. On this note, it bears similarity to the events that have marked the crypto landscape including misconduct, corruption, and slow regulatory response.
At the heart of LIBOR, was the self-reported average rate at which some of the world’s largest banks extended loans to other banks. It was more or less a linchpin of the financial industry, particularly for variable rate loans and benchmarks for performance. However, the 2012 scandal revealed that the system had been manipulated to work in the favor of the banks.
This has far-reaching implications for the world of crypto. Like LIBOR, the crypto sector enjoys minimal oversight over major players that control billions. Despite not forming the bedrock of the financial industry like interbank loan rates, crypto’s emergence as the top-performing asset class in the Q1 this year and its growing popularity among institutional investors cannot be dismissed.
The LIBOR scandal drew light to the downside of a lax self-reporting system, raising concerns about the crypto industry which thus far has been operating on a similar framework, with large players wielding a lot of power with little scrutiny. Questions remain: Will crypto follow in the footsteps of LIBOR? Can the financial system embrace crypto as part of its future reforms?
When the revelations about LIBOR’s malpractices surfaced in 2007 and eventually led to fines and regulatory action in 2012, it was perhaps too late, but necessary. This paved the way for the introduction of the Secured Overnight Financing Rate, an improvement that shifted the power away from the banks by focusing on actual transactions rather than self-reported rates.
Much like the negligence toward LIBOR, regulators turned a blind eye to crypto for many years. Despite its contribution to financial innovation and emerging as a reliable currency for future economies, the mishaps and crises such as FTX’s alleged mismanagement and the bankruptcy filings of Celsius and Three Arrows Capital, did not fail to color the impression of cryptos.
Regulation, when it finally did come, wasn’t uniform. Authorities are yet to agree on how to classify these products and which agency should take the reigns. However, hope lingers that clarity will emerge. The way the financial system held on to its requirement for a reference rate while replacing LIBOR provides some optimism. In a similar vein, demands for access to crypto have surged, and there is collective effort to effectuate this.
Influential financial service organizations like BlackRock and Fidelity have moved towards introducing spot bitcoin ETFs responding to specific concerns laid out by the Securities and Exchange Commission. More banks are launching crypto initiatives that could lead to crypto spot ETFs and regulated products down the line.
In conclusion, mainstream acceptance of crypto not only signifies substantial profits for financial service organizations but also continues to drive financial innovation, birthing novel assets and trading methods. It echoes what transpired with LIBOR and it is a clear sign that regulatory robustness is key to sustain both reliability and innovation in our financial system.
Source: Coindesk
