One is a venerable industry benchmark that was first introduced by the world’s leading global banks several decades ago. The other is a virtual currency that only exists on the internet and that was first proposed by a software developer a mere six years ago.
What could these two financial mechanisms possibly share in common? Regrettably, they have both emerged as instruments of illegal manipulation on a mammoth scale. In addition, they have both raised existential questions about the limits of regulatory authority in a complex and evolving global economy.
Libor, of course, is the variable interest rate that is established by a daily opinion survey of a group of global banks in London. It has become the preferred benchmark for $350 trillion of variable rate loans, swaps, and other securities with valuations that depend on prevailing market rates.
Bitcoin, on the other hand, is the $7.7 billion virtual currency unit that has begun to be accepted as legal tender by a variety of global organizations. Many commentators have praised the Bitcoin as the internet era’s version of an ounce of gold, i.e. as a storage unit of monetary value that is not subject to revaluation by any individual government entity.
Both mechanisms, however, have been targets of manipulation and scandal during the past two years. Regulatory investigations and lawsuits are continuing to plague the global banks that contribute to the Libor rate, while similar controversies and investigations have just begun to stain the Bitcoin market.
Both sets of controversies have also raised existential questions about the limits of governmental oversight. Do banking regulatory officials possess the authority to regulate opinion surveys like the Libor mechanism? Or internet activities that produce virtual commodities, like the Bitcoin system?
Although the British banking authorities have concluded that the Libor survey process is subject to regulation, they are permitting the survey itself to remain in private hands. And the Japanese authorities, responding to the collapse of a major Bitcoin operator in Tokyo last week, are insisting that the Bitcoin is not legal tender and cannot be regulated as such.
In the meantime, though, private investors are pressing ahead with litigation to recover damages for losses suffered in the Libor and Bitcoin markets. Will we reach a point when such lawsuits will force government regulators to focus on these financial mechanisms?
If you were Jaime Caruana, the General Manager of the Bank of International Settlements, the international organization of federal central banks, would you recommend that the global system of financial regulation establish authoritative oversight mechanisms for Libor and Bitcoin?