Hello and welcome to another episode of the Odd Thoughts podcast. I'm Tracy Aloway and I'm Joe Weisenthal. Joe, if I had said to you a few years ago that there's a bank and the bank is taking deposits, you know, checking accounts, and it's putting that money into US treasuries and that business model is going to completely fail, the bank is going to collapse. What would you have said?

Uh, I would have said, "Let's short the stock." That's what I would have said. I said if you told me that and you knew the only insight the only actionable thing there I said all right let's short it

all right that's the right answer clearly if you were a banking regulator what would you have done

well I don't know anything about being a banking regular it seems really hard and regulators in general often get criticized in various ways

and they're like oh you busted this really small time ticky tech etc trading ring it's not that big of a deal or oh here's this uh thing that collapsed and why didn't you catch it before? They're always going to get upset about that. But I have to say I have a lot of sympathy for the regulators because for the most part my impression is that the US has one of the most robust, transparent, high-epth capital markets and financial systems in the entire world, which for the most part does not collapse. And so I feel like when it comes to regulatory issues, there's a lot of unseen where what we see is like if they're in the news, it's not good. But most of the time things aren't in the news. That should be the tagline for America's uh financial system. Most of the time does not collapse.

Yeah.

All right.

Unironically.

Well, I'm talking of course or I was talking about Silicon Valley Bank and the collapse there. And I think it's still very surprising to me. In in one sense, it was an old-fashioned bank run, but in another sense, it's very surprising that here's a bank that's basically buying a bunch of ultra safe assets, US treasuries, and still it ran into trouble. And banks of course are mandated to buy treasuries as well. We've talked about this on the show any number of times now. But

I want to talk more about it.

Sure. You know, the one thing I'll say too that I've been thinking a lot with SVB is I think in the wake of the 2008 2009 financial crisis, we got very focused on the asset side of the balance sheet, right? And so it's like, oh, what do they have? What kind of subprime loans do they have and how good are their all of that, etc. But one of the things, you know, like Josh Younger talked about recently and others, Stephen Kelly had a note in our newsletter, you know, a lot of it is the difficulty in modeling the liability side and the slipperiness of the deposit base and how hard that is to know because you can have long duration deposits that suddenly become overnight deposits. It's really tricky and I still think these are difficult things to understand.

Yeah, it feels like we're always fighting the last bank battle or the last bond battle. Okay. Well, on that note, we do in fact have the perfect guest. We are going to be speaking with Roit Chopra. He is, of course, the former director of the Consumer Financial Protection Bureau, also a former FTC commissioner, so really the perfect person to talk to if we want to dig into what happened to SVB, what it means for bank regulation, and then also what banks are doing right now. Yeah,

Roit, thank you so much for coming on a thoughts.

Thanks for having me.

Here's my first question. Maybe it's a little pointed, but does the CFPB still exist? So, we just got the one big beautiful bill that's been passed and it looks like it slashes funding for the bureau. And of course, we know that Trump isn't exactly a fan of federal agencies. So, I'm curious, is it still functioning?

It was already kind of gutted.

Yeah. Anyway,

yeah, it's a good question. And it seems by every single piece of evidence that it's just maybe there technically, but not doing a damn thing. We are hearing nearly every day about another financial institution that is being released from obligations.

It has been months since there has been an enforcement action and many are estimating that this means billions and billions of dollars that consumers are not getting back in refunds and frankly a big disadvantage to all of those financial companies that follow the rules. when it was working when it or when it was operating. Describe to me what the remmit of the CFPB is and one of the criticisms of the that people leveled is they didn't know what the scope was etc. What is the formal scope of the CFPB?

Well, essentially we saw decades ago that there weren't just banks in the business of offering consumer loans and products. It was all sorts of other companies, payday lenders, auto lenders, and in fact now the bulk of mortgages are originated outside of banks, the bulk of auto loans. And so after the subprime mortgage crisis, there was broad agreement that the Federal Reserve Board and other agencies just didn't focus and have the attention on making sure that existing consumer law

was being followed. So the CFPB is responsible for inspecting the largest financial institutions and taking them to court when they break the law. Of course, also administering all sorts of rules that keep the mortgage markets, the credit report, credit reporting companies, and so many others in line.

How does the CFPB interact with all the other bank policy stakeholders? Because there there seems to be quite a few. You mean the other regulators?

Well, certainly the CFPB is the only regulator that oversees that gigantic non-bank consumer lending apparatus

and also it has primary and exclusive jurisdiction over all banks and credit unions over 10 billion in assets. That means every credit card company, every big player in the market is primarily overseen by the CFPB. So the fact that it is now functionally a dead fish is leaving a very very big gap that no one can even legally fill in.

Where do you see the biggest gap manifesting right now when you look at the consumer financial landscape? What isn't being enforced or what isn't being examined that in your view merits enforcement or examination? Well, I

think the top priority is always trying to understand the linkage between the biggest markets and the broader economy. We saw that that linkage with the mortgage market was pretty damn big and its failure really crashed not just the US financial system but the entire global marketplace. So, of course, making sure that mortgages are fair and transparent, that key rules like the qualified mortgage rule, which sets some of the core standards to make sure there is not predatory mortgage lending, but also Joe, the nuts and bolts. Most of the issues that come in are people who have errors on their credit report. They say, "That's not even my name." or people whose bank accounts were illegally debited or cleaned out due to fraud. There's all sorts of issues that protect specific populations, military members, and so many other pieces that keep the markets working. So, I don't want to pinpoint anything other than to say that when I took office, it was after another few years where there really wasn't much going on there. And we saw how financial firms not just pushed the envelope but sometimes outright took advantage of people without any accountability.

Well, speaking of accountability, you know, we mentioned SVB at the top of the show, and one thing I've heard, there's a little bit of a chicken and egg situation when people are analyzing the root cause of that particular bank collapse. So some people say, well, interest rates went up and that led to paper losses on the bank's bond holdings, and so people got nervous and started pulling their money. And then other people say, well, people started pulling their money even though the bond losses didn't necessarily need to be crystallized anytime soon. So I'm curious, can you pinpoint the spark that set off the latest bank crisis? Well, for me it really was March 8th

2023. Two things happened that day. One was the windown of a bank called Silvergate Bank which was heavily involved in banking some of the major crypto trading platforms. There was a flight of deposits out of that bank after the crypto winter and the collapse of FTX. We had been tracking I serve on the FDIC board and we were tracking Silvergate Bank and on that day they announced that they were not going to need to be put into receiverhip. they would be self-liquidating.

And simultaneously on that same day, we had an announcement by Silicon Valley Bank, which is a little bit of a goofy press release they issued, saying they're experiencing some real losses on their securities portfolio and they're going to be looking for capital. It raised a lot of red flags and suspicions about whether they were viable. And this is something that is just so fundamental about banking and deposit taking is that it really is based on a belief that your money is going to be there.

And the truth is is with federal deposit insurance and Federal Reserve discount window lending, it always is. Except when you have a bank that is over 90% uninsured deposits. This is something that is really unusual and some would argue is not even really a bank

when you are that dependent on very very large depositors that you grew so quickly

and so then the run began. How much would you ascribe it to the high percentage of non-insured deposits versus the concentration? So, in very specific industries. So, you mentioned the crypto one, but also here were all of these startups that had raised a ton of money in 2020 and 2021. A bunch of them apparently just put their money in a bank, which is kind of weird to me, and uninsured. And then we had the stock market plunge in 2022. Funding dried up. There was no very little new VC fundraising. So new dry powder to be put into the bank. Startups drawing down their own deposits just to make payroll or whatever else. And so you have two things going on. One is the high level of uninsured deposits, but also the concentration. So that there was this one specific sector that was all going through the cycle at the same time. So let me just push on that because even though it is one sector and I agree with you the concentration

was an important factor in this but let's remember that the individual firms that were funded by venture capital many of them were doing fine. Um there was not necessarily something specifically or systemically wrong with those businesses. But I think and I agree with every small and midsize business out there. If I am launching a startup, whether it is an AI company or a dry cleaner, it doesn't rank in the top 20 reasons of my business failing that my bank is going to fail.

Sure. And so what you start hearing is that these businesses which are highly networked as well as much faster communication, you get the advice from your funders and others that you need to run.

And it was very clear that it was not just happening at SVB, it then was happening all over the system. I was on a train to Connecticut around that time and someone was sitting kind of close to me and it turned out they were banking with SVB. Their company was and I could hear the panic in their voice as they tried to like digest the news of what was happening. But on that note, why did corporate treasurers why did they put all their deposits in a single bank when presumably they know that there's a cap on FDIC insurance?

Yeah, it it's a good question. I think there are some practical issues for some small and midsize businesses about when you're running payroll or when you're getting in a lot of receipts. I don't have as much sympathy for some of the very large companies that we have learned through public reporting put a whole lot of funds in that bank

including really their entire cash reserves. So at the end of the day though the regulators we had we saw an active run that was occurring and of course those insured depositors the insured depositors really through the entire crisis did not really run. It was those uninsured

it beca it started at Silicon Valley Bank after that Wednesday release by Friday morning they were dead. We had actually voted the night before or maybe at the pre-dawn hours to accept it into receiverhip and I believe by the time it was closed it had roughly $und00 billion queued up of outbound wires. So this was an enormous and fast run. And many of those technol libertarians that we often hear about who want no regulation, they were actively beating the drum online asking

for a bailout.

Well, this is actually interesting point and I was going to go there next and I think again it was a thing that Stephen Kelly wrote for us, but one of the things about 2023 I think he said it wasn't a crisis of regional banks. It was a regional bank crisis as in specifically the region of California because then there were other parts of there were other banks that got into a lot of trouble and the all thing they had in common was that they were all sort of in some way connected to California. I think I remember like people were going out looking for any bank that had California in the title in some way and betting against them. But talk to us about regulating banks and monitoring runs in a world of these networks, whether they're the public networks on social media or just the sort of networks of like-minded individuals who are all in the same WhatsApp group.

Yeah, I'm a believer that we can never fight and we shouldn't want to fight the speed of communication. We want markets to have live information. I will say this, we saw the run start first at Silicon Valley Bank and then I think because of the confluence of factors with Silvergate, it wasn't just California is anything that seemed to have any crypto or tech adjacency. Of course, the second bank that we closed that Sunday was Signature Bank, which operated a crypto network, but also had a very real business. It is a New York City bank that was deeply involved in New York City multifamily real estate. You at the same time Joe had people worried about commercial real estate.

But what we were seeing was that the banks with the highest percentage of uninsured deposits, they were being badly battered almost immediately.

So ultimately a decision was made to expand the deposit insurance net and basically bail out SVB customers and others. What was the decision-making process like building up to that? And how big a deal is that? Is there like a legacy from that decision?

It's a very big deal and it's one that in many ways is still hard to live with the decision even though it was the right decision. I think

here's how it works. The federal law basically directs the Federal Deposit Insurance Corporation, the FDIC, to resolve a failed bank at the least cost to the deposit insurance fund. That's the fund that everyone pays into with their bank deposits. And it builds up a fund to pay for certain bank failures and make sure deposits are made whole. And here's what was interesting about Silicon Valley Bank and Signature Bank and then later First Republic. It was a super majority of uninsured deposits. That means a bank failure is not that expensive to resolve. the cost to the deposit insurance fund for a bank that is 90% plus uninsured is going to be pretty low. And if the law says resolve it at the least cost, in many ways the best case is sometimes to liquidate it, make as many people whole as possible and top them up with the deposit insurance fund. But there is a proviso in the law which says that if a failure is likely to lead to systemic effects or to threaten the viability of the US financial system. There's a process of key turning that a series of regulators must go through to recommend to the Treasury Secretary who must consult with the president to authorize the FDIC to take a different path. So over the weekend, the Sunday after the failure of Silicon Valley Bank and Sunday morning roughly, Signature Bank was taken into receiverhip.

First Republic was a zombie and basically dead already.

Oh yeah.

There was a decision where the FDIC board, we voted to turn that key and the Federal Reserve Board had voted to turn that key and ultimately the Treasury Secretary discussed it with the president and activated that authority. The authority essentially led to the backstopping of all uninsured deposits.

That meant that everyone would be made whole in the case of the failure and it was a tough decision. I think there was a question.

I was arguing and questioning should we be maybe raising the limit dramatically perhaps to 25 or $50 million. What we were seeing in the system was active movement of uninsured deposits everywhere.

And ultimately the decision to invoke that exception really did calm the system for the most part with the big exception of First Republic Bank.

So the other thing that happened other than the expanded deposit insurance was the creation of a new Fed lending facility. Another acronym, the BTFP. How big a deal was that one?

That one was weird. All banks have the ability to access the discount window through the Federal Reserve, right?

right?

But the Federal Reserve used some bailout authorities to launch this bank term funding program. This allowed banks to pledge their Treasury securities at par and draw

draw funds from the Federal Reserve. I think there were a lot of us who raised our eyebrows at this. If the banks already had access to the discount window, why did they need this special program? I worried about the precedent setting of this. It was justified on the basis that there is stigma of going to the discount window. Ultimately, we saw some financial institutions game and arbitrage the program by drawing on it but then earning interest on reserves. I think we just have to be really careful when the Fed engages in lots of bailout programs because it sends a signal to the market that they can expect it the next time around. as a regulator and there are many people who say this and I you had a high level of scrutiny towards companies that banked crypto companies and many of them claimed that they were treated unfairly. What is it just from a high level? Let's start there. From a high level, what issues emerge when if any issues emerge from a bank that tries to build up a business among crypto companies?

I think this is a bit of a conspiracy theory.

Yeah. No, look, I'm but I'm just from a regulatory pers. Okay, go on. Because the truth is is that the issues with Silicon Valley Bank as you know and and described earlier was really about being so deeply underwater on their treasury securities.

But there's whether we're talking about Signature Bank which did have a pretty big crypto book but also you just get all these crypto companies like oh we don't have it's so difficult for us to find a bank account. Is it difficult for them to do banking?

Yeah. So let's see what we mean about banking for for crypto lending.

Certainly there are going to be some banks who feel they have no expertise in this. I think the really interesting question is about deposit taking.

Yes, definitely. I'm not talking about crypto. I'm talking about the deposit taking from cryptonative or crypto companies. deposit taking. There are a set of issues that banks always are going to want to look at when it comes to taking very very large deposits with a lot of in-n-out activity. And much of that is related to their own obligations for money laundering as well as what was mentioned before deposit concentration. So when you are a bank that has a couple of depositors who are the super majority of your deposit base, you are obviously going to take some steps to be careful around that. And I would say that the crypto issues in this run were fairly muted. It was really the perception about the potential exposures that we saw through the market. Though I feel that within a few days the fixation again was on uninsured deposits.

When it comes to the bond losses, it strikes me that the Fed is kind of in a difficult position because on the one hand it has to conduct monetary policy. If inflation is high, it has to raise benchmark rates. But on the other hand, it also has a financial stability mandate. It's not part of the dual mandate, but it is a regulator. and raising interest rates in this case sparked a bank run it seems. How is the Fed supposed to balance these two goals?

I don't see that as a balance at all. Okay. I think there is a lot that the Federal Reserve has really missed the in in many of the situations involving financial stability around Lehman Brothers as well as even including COVID. But certainly this one was a more clear linkage where when you have high concentrations of bond portfolios that are underwater, you need to be extra careful to not make sure that they are under capitalized, that they lack liquidity, and frankly that you are not turning a blind eye when you are supervising that institution. The warning signs with Silicon Valley Bank were there for months. And I do think there was a bit of a culture at the Federal Reserve of really taking a light touch in the years leading up to the crisis that I think has proven to be costly.

I want to go back to crypto because I want to talk not just I understand the the obligations that a bank has in terms of money laundering in terms of lots of in-n-out transactions etc. However, from a regulatory perspective were banks that built up a crypto book of business did they get extra scrutiny in some way or did they does that merit extra scrutiny?

I think you always want to make sure that rules are as clear as possible. And I do think bank regulation has turned into really a messy set of rules. Frankly, I think to accommodate the largest players rather than simple bright line rules. with when it comes to new types of activities,

there's no question that novel activities are going to need a little bit more look than say a straightforward mortgage or a straightforward small business loan. So when you have particularly a bank that doesn't have experience in a product that may pose some real risks to them, I don't think it's unreasonable for a bank regulator to kick the tires.

What is kicking the tires look like specifically?

I think it can take a wide range of activities. It really depends on what type of new business that that bank is offering. But at the core making sure that that bank is well capitalized and liquid

is always the top priority. But of you know banks play a major role in the financial state craft of America and one of the big reasons and benefits of the reserve currency is the role in detecting and deterring terrorism, finance, drug cartels, and more. and federal law puts some real obligations on them for that.

Okay. So, speaking of novel businesses, I want to widen the net a little bit and maybe talk about fintech and what banks are doing right now. And here I have to issue a disclaimer which is I am very jaded about fintech in general. I used to cover it at the FT and I heard the same stories, the same themes over and over again like big tech is coming for the banks or retail is coming for the banks like Walmart start starting a financial product and things like that. Fast forward to today, I mean it does seem like this is something that is actually happening. What's the ultimate ambition there in the payment space? Well, payments is really something that has so rapidly changed. Many of it is very good. It's easier to移动 money, particularly with mobile devices. It's faster than it used to be. I do think that we have some real concerns about the playbook that many of the firms who are moving money, how are they monetizing it? A lot of our payments companies and big tech companies I think are really drooling over what they see in China where Alip pay and WeChat pay are trafficking almost all of the consumer payments non-cash payments in

Well, payments is really something that has so rapidly changed. Many of it is very good. It's easier to move money, particularly with mobile devices. It's faster than it used to be. I do think that we have some real concerns about the playbook that many of the firms who are moving money, how are they monetizing it? A lot of our payments companies and big tech companies I think are really drooling over what they see in China where Alip pay and WeChat pay are trafficking almost all of the consumer payments non-cash payments in

you can't pay in cash at a Starbucks in Beijing. I know from personal experience

and we there's a lot of questions about what is the monetization scheme there. When I was at the CFPB, we led a study that looked at all of these major payment platforms. And I think there was a desire to monetize a lot of that payments information through surveillance, being able to know exactly not just the amount someone is paying, but the skew level data in their basket, ultimately feeding a foundational algorithm that ultimately could serve up personalized prices.

There was lots of issues we dealt with when it comes to fraud and identity theft. There were certainly issues when it comes to the shift of where money was being stored. Many people believed that the app they were using to send money had money in a bank account somewhere but in fact maybe it was in an uninsured account. So I think that we should be looking at payments in terms of what is the ambitions of those companies and why do they want it. We worked hard with global central banks and regulators to inject more competition.

Apple for example had a real chokeold over iOS devices only allowing Apple Pay to be used. Europe has banned that practice. other countries are looking to restrict it as well. So I think that stable coin and once stable coin becomes part of the broader ecosystem which it may it will open up some additional issues about how payments in America will ultimately work. Yeah, I was just

going to ask about that actually because to some extent that seems like a potentially good thing if I'm worried about okay there's a handful of internet giants and a handful of commerce giants who want to have more and more skew level data about myself and what I buy to my mind it seems possible that stable coins and having your own distributed wallet on your phone or something like that could change the architecture of the internet such that there isn't such a information bottleneck that only a few giant companies have access to.

Yeah, it depends on who's issuing them. Okay. When I was at the Federal Trade Commission, Mark Zuckerberg, Cheryl Sandberg, others

announced the Libra project, which I think was completely a way to cement more of a moat of Facebook and and now Meta's empire of being able to track and trace the flow of money and ultimately to be able to ensure that merchants operating in their ecosystem would use their currency of choice. So I think it's really important that we do not have payments and money controlled by any real big commercial player. it is if it if there is a stable coin that is issued completely separately that is not affiliated with one of those companies but I worry that the market could easily tip toward an existing big tech network and ultimately that might provide huge advantages to that firm but not necessarily the whole economy. Tracy, you know what's funny to me is, you know, you have all the crypto people and there a lot of them got really upset about Libra again and how that thing whole failed. But to my mind, if you think about it, many of those same tech people hated the speech regulations that existed on the big social networks in the early 2020s and the late 10s and the idea of shadow banning and all of this stuff. And it's like, imagine if they did that to payments, right? Like do you really want to invest that same power that they have to decide what is appropriate speech and not appropriate speech into the realm of okay now they also have the ability to regulate what is appropriate payments and inappropriate payments. That's a lot of investature of power.

This is the issue that came up in the UK right there was already some drama about who was it Nigel Farage's bank account being taken away because of his politics. So yeah, that concern is definitely there.

And we had that here where PayPal had sent out some terms and conditions that allowed PayPal to find people for their speech presumably off platform. And I think we need to be really careful about giving any of those firms the ability to really have a big footprint either on speech or on commerce. And that is part of the reason why most developed countries have separated banking and commerce. But we are now potentially in a new era. And I would argue stable coin is not really about crypto. That might certainly be the technology, but it is essentially a new type of payments and banking charter.

Wait, talk more about that because most people when they think of stable coins, they probably think of a money market fund, but as you point out, there's a huge overlap with banking in the sense that stable coin issuers are taking in people's money and for the most part supposedly putting it into things like US treasuries, maybe gold, ultra safe assets. And the whole business is built on the premise that depositors are always going to get their money back. Right. That seems like an echo of a bank.

That's right. And I think over time we have seen how the line has blurred between a bank and other types of deposit instruments. You know, essentially the Federal Reserve has multiple times needed to stabilize money market funds and in fact has a facility at the New York Federal Reserve, the overnight reverse repo program that one could consider a sort of daily bailout program to keep it stable and transmit monetary policy. I really worry that if we keep having enormous flows from banks to these money funds, we are essentially going to create problems with how we transmit and intermediate credit to the real economy.

I would argue that a stable coin, if it was a tokenized bank deposit

versus a tokenized money market fund, has a lot of different effects long term. Most of us know that banks are still the key to lend to small businesses, to lend to farms, and to lend to the real economy. If you are essentially putting a thumb on the scale toward money market funds or tokenized money market funds, the beneficiaries are very large firms, sovereigns, and others who can access those money markets. So we should really want to make sure that banks or there is some something that takes the place of filling in the gap for small businesses, farmers and others who depend on bank credit.

So the Senate in June passed the Genius Act to, you know, start creating a more robust set of stable coin regulations, but it did not allow for yieldbearing stable coins. So that's a great business if you're in the stable coin business. Collect all that yield, but you don't have to pass it on unlike a bank. What's your perspective on that? Is this about preserving the importance of deposit taking bank institutions so that they're not dismediated into this way or is this just a sop to the banks so that normal old deposits are still a good business?

It's a very messy piece of legislation. I think there is some arguments that yield chasing of a uninsured product is probably a recipe for more bailouts and more mess. On the other hand, we can't be setting federal laws to advantage banks. Um, they often get what they want anyway. I would argue that one of the best ways to pursue some tokenized payment systems that could potentially disintermediate the incumbent payment networks would be to use tokenized bank deposits. And just like we could have paper cash, each issued by a different regional Federal Reserve Bank, our digital wallets could host tokenized bank deposits that are sitting in banks across the country and being intermediated into credit to the real economy. I think what we see is largely a legislative framework that is going to benefit the big crypto incumbents.

Well, speaking of benefiting the big, another largeish trend in the banking system is consolidation, of course. And post the financial crisis, I think we saw the number of small banks, regional banks out there absolutely plunge. And I think it took a few years before we actually got a new bank set up, a denovo bank. And it was, I think, in Pennsylvania, Amish country, which was kind of funny.

I guess my question is like presumably you want a diverse network of lenders out there because you want to avoid the too big to fail problem and you want people to have access to credit to your point earlier. How do you encourage a more diverse or dynamic banking system and avoid the outcome where, you know, Joe and I always like to throw up the charts of how JP Morgan or Wells Fargo came into being and it's just a story of them snapping up lots and lots of companies.

Decades ago, there was a Supreme Court case that was very preient that warned that consolidation in the banking system would ultimately contribute to mass consolidation in the real economy. And you're right, the number of small community banks has dwindled. And there's all sorts of reasons for this, including changing technology, consumer preferences so much more. But I think one of the real big reasons is that there is a perception that the very largest banks as you mentioned will be protected. When Silicon Valley Bank was failing, where was all the money flowing to?

They were taking their money out of Silicon Valley Bank, Signature Bank and others. It went to the very big guys because every investor believes that these banks are essentially always going to be protected. They are able to raise money with that implicit guarantee and that means they are able to out compete on so many dimensions unfairly I think their smaller counterparts. So I I really think we need to be careful about giving benefits and picking winners and losers and that's what we have been doing is essentially picking the very largest banks as the winners and others as the losers.

We recently had the Robin Hood CEO on the podcast. They're very excited about tokenization of all kinds of things including uh tokenization of stock for that matter. And due to uh crypto technology of some sorts, there's enforcing borders in terms of defining what a regulatory perimeter even is from a geographical standpoint is really hard. And due to smart contracts and stable coins, etc., It's very plausible that you could somewhere in the world, maybe in an offshore or a lightly regulated country, create some token that tracks some regulated instrument and it trades like a regulated instrument up until maybe something goes bust. Is there a danger that regulating consumerf facing financial products that law won't be able to keep up? that there is this sort of like technological explosion of things and that to some extent because anyone who has access to a stable coin wallet and access to the internet could theoretically trade anything anywhere that it would just be a crisis from the regulatory perspective and keeping a handle on everything that's going on.

Well, I think we do have a jump ball right now on the future of the dollar. We do see the Trump administration very interested I think in fundamentally rethinking the role of the dollar in the system. You raise this example of technology but for years we have seen I believe it's a $14 trillion market of offshore dollars euro dollars which poses very serious and significant issues for the entire regulator. Now we could have euro stocks like literally not the Euro stocks index but something that resembles in trading a US listed regulated stock except it's on some digital exchange. It's a decentralized exchange but it moves in the same way and how do you even like begin to wrap your head around? I think the way in which you want to is constantly to figure out how do we solve real problems in the economy

and how do you build for that rather than allowing for products services to create it purely based on arbitrage. I also think we want to make sure that we don't try and create something so complex that it will always be arbitrageed around and we need a lot more simple bright lines that investors, consumers, everyone can really easily understand and easily follow.

Ultimately, the US is going to be the place where people want to do business because of strong rule of law and a good legal system and all of those things. And that's one of the most important things to safeguard. Speaking of novel businesses and I guess the idea of policy kind of chasing after new tech, I'm just going to go all Seinfeld on this question and ask what's the deal with buy now pay later because that is everywhere nowadays and obviously

the question the wider question it poses is whether or not consumers are just taking on a load of credit in a new way that possibly isn't accounted for very well. Well, it's always interesting.

There's a table published by the Federal Reserve about consumer credit outstanding and it is always missing many things including buy now pay later which we have seen surge through the pandemic growing more than 10x.

Wow.

It has really changed quite a bit. Tracy by now pay later strangely was not really homegrown in America. It came from other jurisdictions. It was popular in Sweden, Australia, and now it is a major form of credit. Just so everyone understands what it is,

you take out a loan, often pay in for. It does not have an interest rate, but the the buy now pay later lender takes a cut from the merchant just like a credit card company does. So you have seen a lot of consumers believe that this is a better way because it is no interest. But the CFPB

did extensive study on it and found that there's very significant issues when it comes to people returning goods and not necessarily getting it credited.

There's issues of people having multiple buy now pay later loans across different lenders and are levered up. I would hear actually complaints from auto lenders who would say to me, "How am I supposed to write this auto loan if I don't know what the buy now pay later loans are?" Because they're not on the credit report. Often

this this strikes me as super interesting. I mean just like how inadequate right now is our tracking both in terms of the scale of it just when we think about okay we want to have aggregate sense of consumer consumer indebtedness and then how how much of a struggle is it for actual lenders to judge the creditworthiness of consumers because of the lack of visibility into the

BNPL the faster it grows the more difficult it will be and I think a key piece of this is we are seeing all sorts sorts of buy now pay later like products go beyond the traditional lenders. We're seeing banks and credit card companies saying use my card and then go online and you can convert it to buy now pay later or some people thinking about how to

connect it to community bank debit cards. So I do believe it is a big blind spot about consumer credit outstanding right now. Obviously, it is a relatively modest piece of the overall unsecured debt, but if it continues its trajectory, even if it slows its growth, it will be a big piece of that pie.

I mean, presumably by now pay later would fall or could fall under the remit of the CFPB, but

Well, it does.

It does, but I mean the CFPB is not really functioning anymore. That seems like an issue.

Well, what we are seeing is that the protections that the CFPB tried to put in place for buy now pay later borrowers, some basic ones, and you can get some statements that you're able to return goods and get it credited.

It looks like a lot of that is just being thrown in the trash or just not enforced. We are seeing states all over the country though looking to beef up protections because they see how this could create a treadmill of debt for people. Just one more question from me. So you were head of the CFPB under the Biden administration and you were at the FTC under the first Trump administration and you got to experience some some of the second Trump administration. What's your sense of the difference between Trump 1 and Trump 2.0 and how that administration is operating and thinking about things like regulation?

Yeah, I think that there is when it comes to finance a real sense of concern about how they want to think about the dollar and how they want to think of the future of Treasury securities. I see Secretary Besson talk very deliberately about wanting stable coin, for example, to be a way to boost demand for treasuries. Of course, there's lots of issues with that,

but I think more broadly, the first Trump administration was a lot less organized and now there is a clear clearly a plan that they are executing on even if it seems chaotic. So I think for those who have concerns about it, I don't think they should write it off as just chaos or craziness. I think there is a lot of things that are being done that will have lasting effects on the financial system.

All right, Roit Chopra, thank you so much for coming on a thoughts. That was so interesting and really good to get a regulator's actual perspective. Thanks for having me.

Thank you so much. That was great.

Joe, that was really interesting and I'm so glad we could have Roit on to give a sort of fly onthe-wall perspective of a regulator during, you know, what was a pretty dramatic time.

There's so many interesting things happening in FinReneg right now in general. just obviously the sort of like turning of the dial you know I think like a really big picture story that doesn't get a lot of attention because we focus a lot on the changing administrations because the financial crisis was a really long time ago these things always eb and flow right so you have a crisis and everyone cracks down and you sort of uh you know you do the max and then memories fade you're like why do we have the like this is I feel like it's human nature as the 2009200 reforms go further into the past, we're just going to have this sort of natural loosening until the financial crisis of 2045 or whatever it is.

Well, I mean, why do we have the CFPB? The whole answer is it was created after the 2008 financial crisis. The other thing I thought was really interesting and this gets to the consolidation point which I think is a massive massive story in uh the US financial industry but it's just that idea of okay if you're worried about your deposit at a smaller bank the natural thing is to move it into a too big to fail bank because you know that the US government based on precedent is not going to let them go and so so that again seems to give the big banks a sort of uh unnatural edge perhaps in terms of deposit I mean, I we I know we talked about this after SVB in multiple episodes, but the sheer number of banks in the United States that still exist like boggles the mind, right? There is no other country in the world that has as many. Canada's like six banks. We're so heavily banked in this country. It's still today the random

There used to be a lot more. A lot more.

Yeah. But I mean it's staggering the number of community banks and regional banks that exist in the United States even with all the consolidation.

No, I don't know. I I mean I I like genuinely don't know like what the optimal distribution is or anything, but given the advantages that the big banks have, the perception of safety, their technological capabilities that they can invest in that a community bank will never be able to replicate, brand, etc. the proliferation of banks is still like a sort of interesting phenomenon of our financial system.

The other thing that struck me from that conversation was the buy now pay later stuff which you know

we got to do more on that period.

Absolutely. It's becoming a really interesting story but it just kind of blows my mind that no one is actually tracking that credit because the whole thing is supposed to be technologydriven. It's plugged in to the checkout process of a website. It's really easy to do. It seems insane to me that like the credit bureaus can't track it at the same time and it seems like a huge huge data hole for the US economy.

That's a huge story. I completely agree. And then uh you know we sort of talked about at the end. I mean I think

it's such an interesting question the degree to which if it happens we'll see stable coins become part of the payments landscape in a meaningful way rather than just a way to get money onto cryptocurrency trading websites which is where they began. And then all of the things around tokenization of equity. I mean, it's just a fact that Robin Hood, whose CEO we had on, unilaterally announced that at some point there's going to be some version of tokenized equity or tokens that correspond to equity in private companies, doing it unilaterally. How regulators are going to actually get their handle on this, I have no idea.

Yeah. Tokens, tokens everywhere and not a bank to lend. I think that was Roit's point, right? All right. Shall we leave it there?

Let's leave it there.

This has been another episode of the Odd Thoughts podcast. I'm Tracy Aloway. You can follow me at Tracy Aloway.

And I'm Joe Weisenthal. You can follow me at the stalwart. Follow our guest, Roit Chopra. He's choprausa. Follow our producers, Carmen Rodriguez, Carmen, Dash Bennett at Dashbot, and Kellbrooks at Kellbrooks. For more OddLots content, go to bloomberg.com/odlots.

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