This switch is significant far beyond lending rates, underlining that real change and innovation are possible in the financial system, even following misdeeds and corruption, said Dmitry Gooshchin, chief operating officer and co-founder of Endotech.io. And it offers hope for crypto and financial innovation that takes advantage of new technology.
The Secured Overnight Financing Rate (SOFR) has replaced the London Interbank Offered Rate (LIBOR) in the United States, a transition that has taken more than 11 years since a scandal enveloped LIBOR. This switch is a sign of hope for the crypto sector, which has suffered its share of misconduct and misdeeds with which regulators and other officials have been slow to keep pace.
LIBOR represented the self-reported average rate at which the world’s largest banks would loan money to other banks. It was often seen as the lower boundary for any type of loan or performance benchmark – a pillar of the financial system and reliable benchmark. Variable rate loans, adjustable mortgages as well as instruments like swaps and futures were usually tied, to some degree, to this rate.
But then scandal hit with the revelation in 2012 that banks were artificially controlling the rate, including by reporting borrowing rates at levels that would benefit their swap traders, and make banks look more insulated from risk than they were. Safeguards were few, and the system, which relied on banks to simply report what rates they would charge, basically left the mice guarding the cheese.
This is similar to how the crypto sector has been operating; with little oversight on big players controlling billions of dollars. Crypto has become a bellwether for innovation in the financial sector, and officials should have noticed the irregularities in LIBOR earlier and taken action.
Despite the long timeline, SOFR is undoubtedly an improvement – mainly because it is based on actual transactions, not just on rates that banks report as the lowest they will accept. This reduces some of the concentration of power that large banks had, and reflects the reality in the market. It also means that the financial system still has something it demands – a reference rate.
Demand will spur crypto’s increasing acceptance and growth. BlackRock, Fidelity, and other financial service powerhouses have recently filed applications for spot bitcoin ETFs, addressing specific concerns raised by the Securities and Exchange Commission’s in rejecting multiple, similar products over the past few years. A number of banks have also introduced important crypto initiatives that will eventually lead to crypto spot ETFs and other regulated products.
Bringing crypto into the mainstream is not only a way for large financial service organizations to make money but to continue financial innovation, leading to new types of assets and trading methods. Just like the financial system needed a benchmark and worked to replace LIBOR, it is now demanding access to crypto, and working to make that happen.