Think Cryptocurrency Is Too Small to Cause a Recession? Its Toxicity Might Surprise You – Workers Comp Forum

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Scenario: Imagine, it’s 2050 and globally, digital currencies are having a moment.
Years before — as the world recovered from the COVID-19 pandemic and war raged in the Ukraine — people began moving money into digital assets. Cryptocurrencies like Bitcoin, which financier Warren Buffett once referred to as “rat poison squared,” experienced a boom in popularity as high inflation rates in the U.S. made investors wary of other assets.
Even Buffett got in the game, investing $1 billion in a crypto-friendly bank in 2022.   
A financial services sector sprouted up around these assets and soon everything from Bitcoin-backed loans to insurance contracts executed on blockchains were flourishing. The early days, when Bitcoin saw wild fluctuations in value, seemed to be a relic of the past. 
Until one day, when a rogue billionaire took to Twitter to announce that his company would no longer be accepting cryptocurrencies for its products; he only wants fiat currencies from now on. 
A few other companies follow suit and soon consumers are flooding banks trying to withdraw their money from digital currencies and exchange it for U.S. dollars. Economists start to wonder: Could crypto cause the next recession?  
Analysis: Over the past few years, cryptocurrencies have exploded in popularity and value. 
Last year, the cryptocurrency market grew to more than $3 trillion in value — more than quadruple what it was worth in 2020 — Time Magazine reported. 
These assets, which got their start when Bitcoin made its debut in 2009, seek to create a financial system free of the oversight of governments and big banks. 
In the wake of the financial crisis, early crypto-users fantasized of an economy free of the politicians and financiers whose actions led to the 2008 financial crisis. As Wired reported back in 2011, it’s not a coincidence that Bitcoin’s mysterious founder Nakamoto released his paper outlining how his currency would work in 2008 just as the U.S. government was bailing out big banks and automakers. 
Instead of a third-party maintaining its ledger, Bitcoin uses a collective network of cryptocurrency miners to keep track of its transactions and create new coins. Since transactions are recorded on databases on many different computers, users can keep track of one another and make sure no one is tampering with the system.   
“Bitcoin and cryptocurrency were created by Satoshi Nakamoto exactly when the economic crisis of 2008 kicked in,” said Alex Lemberg, CEO of the Nimbus Platform, a blockchain-based company that specializes in decentralized finance solutions.
Now, the Motley Fool reports there are more than 12,000 cryptocurrencies. The real-time blockchain ledgers that record transactions and keep track of how much cryptocurrency is out there, are being used to track everything from vaccine temperatures and outbreaks of foodborne illnesses to tracking supply chains and documenting the sale of digital art through non-fungible tokens (NFTs).  
In 2018, a group of software developers and entrepreneurs coined the term decentralized finance (DeFi) to describe financial services that are automatically executed on blockchains. 
Decentralized exchanges and lending systems allow people with digital wallets to trade assets, invest in a Roth IRA, take out loans or take out insurance policies, oftentimes using cryptocurrencies. These exchanges are often executed on smart-contracts, which are programs set to execute an agreement automatically if certain conditions are met.    
“Decentralized financial applications are the same as regular mobile applications with one addition — its back-end code is run on blockchain, thus creating working scenarios for smart-contracts,” Lemberg said. “This way a decentralized financial application eliminates a central intermediary, whose functions were automated.”
Though the cryptocurrency and decentralized finance sector at large isn’t currently big enough to cause an economic recession on its own, the industry is growing. And many of crypto’s creators and early backers have hopes that it will one day take the place of government-backed currencies. 
But economists can’t help noticing the ways in which cryptocurrency mirrors the subprime mortgages that played a key role in causing the Great Recession. 
Back when housing prices were on the rise in the early 2000s, borrowers with poor credit ratings — generally defined as those with a FICO score below 620 — would take on risky mortgages, anticipating that they would be able to refinance quickly with better terms as their property values increased. These types of financing schemes were known as subprime mortgages and in 2007 they accounted for about $1.3 trillion in outstanding mortgages.    
These homes were then used as collateral in a system known as “shadow banking,” in which global finance firms would rely on each other to borrow money. 
Under the shadow banking system, one commercial or investment bank would borrow money from another, usually a larger firm, after realizing its reserves were low and it was at risk of illiquidity if too many debtors or mortgage holders defaulted. As collateral, the bank seeking the loan might put up a house they hold the mortgage for in a process known as rehypothecation. 
Once it receives a loan from the lending bank, the loaning institution can either loan out the newly acquired cash with the hope of increasing its revenue through the interest generated or they can keep it in the vault to maintain its liquidity. 
When the mortgage-backed security market started imploding in 2007 due to subprime lending, shadow banks started recalling their loans and returning their collateral. From there, panic-ensued. Bear Stearns and Lehman Brothers went bankrupt. The economy endured an 18-month recession. Over six million American households faced foreclosure.  
Though with a market that was recently worth only a little more $3 trillion globally, there are certainly fewer people invested in cryptocurrencies than in housing. (For comparison, just the U.S. housing market was worth $6.9 trillion in 2021). The similarities between crypto investors and those who took out subprime mortgages are enough to give economists a pause. 
“I’m seeing uncomfortable parallels with the subprime crisis of the 2000s,” New York Times opinion columnist Paul Krugman wrote in January of this year. Krugman is a distinguished economics professor at the City University of New York and a 2008 Nobel Memorial Prize in Economic Sciences winner. 
“No, crypto doesn’t threaten the financial system — the numbers aren’t big enough to do that. But there’s growing evidence that the risks of crypto are falling disproportionately on people who don’t know what they are getting into and are poorly positioned to handle the downside.”
In his article, Krugman pointed out that crypto-investors differ from those who typically put money in risky assets, like stocks. Stock market investors tend to be college-educated white people, with 77% of college graduates and 65% of white people owning stocks, per the most recent Gallup research. In contrast, 44% of those invested in cryptocurrency are non-white and 55% don’t have a college degree, per a survey by NORC.
These are some of the same groups of people who were targeted for subprime mortgages, which were heralded at the time for opening up the benefits of homeownership to those who had previously been excluded, Krugman writes. Today, crypto has been praised for bringing people who have been traditionally eschewed the stock market into the world of investing. 
“I may not think I have the ability to enter the stock market and purchase stocks if I’m a single mom and make $40,000 a year,” Angela Fontes, a vice president in the economics, justice and society department at NORC, told CNBC Make It in 2021. “But I may think I can get some cryptocurrency. I don’t need a broker to do it and I don’t need a 401(k) account.”
With their sharp dips and leaps in value, Krugman questions why such a risky asset class is being sold to people who may not have previous experience investing or a lot of money to lose in a crash. 
“Maybe the rising valuation (although not use) of Bitcoin and its rivals represents something more than a bubble, in which people buy an asset simply because other people have made money off that asset in the past,” Krugman writes.
“But these investors should be people who are both well equipped to make that judgment and financially secure enough to bear the losses if it turns out that the skeptics are right.” 
Crypto may be too small to cause a recession now, but if the digital currencies achieve their creator’s highest ambitions and become a critical part of the economic system, their fluctuations in value may have the ability to create a run on the bank. 
These concerns are especially acute for stablecoins, which are pegged to a fiat currency like the U.S. dollar. 
“If all of a sudden, everyone is flooding out at the same time from crypto, they have to redeem those stable coins for the value that it’s been pegged to,” said Jacob Decker, vice president and director of financial institutions at Woodruff Sawyer.  “So you can cause this kind of run on the bank type effect.”
It’s not just startups getting involved with these risky assets either. In April, Goldman Sachs announced it is now offering its first Bitcoin-backed loans, Bloomberg reports. 
“We’re seeing big players in Wall Street — like the traditional financial institutions, the endowments, the pension trusts — looking at this as a hedge against put from USD or fiat currencies,” said Benjamin Peach, associate director, digital assets at Aon.
As more consumers and financial institutions invest in digital assets like cryptocurrencies, there is evidence that speculators are beginning to borrow money to buy crypto assets, deputy governor Sir Jon Cunliffe of the Bank of England has warned, per reporting from the Guardian. 
That same report noted that surveys suggest that spending on cryptocurrencies is backed by about $40 billion of borrowed funds.   
Hopefully, banks would avoid rehypothecation with crypto assets — the market is so unstable right now it would be highly unlikely — but if the finance industry writ large begins to view digital currencies as a more stable asset class this could change, potentially resulting in the same knock-on affect the housing market crash had during the Great Recession. 
Governments are already turning an eye to the risks cryptocurrencies pose to financial markets.
In March, President Joe Biden signed an executive order directing the federal government to draw up a plan to regulate cryptocurrencies, as digital assets are becoming more popular and they have the potential to destabilize traditional financial systems. 
Other countries have already started regulating cryptocurrencies. The United Kingdom has adopted regulations that cover  cover anti-money-laundering, counter-terrorism-financing, and other rules and in September of 2021 El Salvador became the first country to recognize Bitcoin as a legal tender — despite the protest of its citizens
Still others have completely shunned digital assets. China enacted a flat-out ban of crypto and other private currencies in 2021, Fortune reported.  
“I think you see a couple of different camps developing around the globe,” said Vanessa Savino, deputy general counsel for tZERO, a digital securities and cryptocurrency trading platform.   
“You have countries like El Salvador, and they passed the law to declare Bitcoin legal tender. On the other side of the spectrum, you have countries like China who have almost banned any kind of privately issued cryptocurrency.” &
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In August, the Florida Division of Workers’ Compensation (DWC) released plans to rescind a 2020 bulletin that conveyed workers’ compensation payers had to cover the costs of physician-dispensed drugs without limitations.
Physician dispensing — when doctors prescribe and dispense a medication directly to patients from their office — is a common practice that many states have placed limitations on in the past to ensure the safety of injured workers. It bypasses the Pharmacy Benefit Management (PBM) systems put in place by many employers for the oversight of safety and affordability of the drugs prescribed.
Alan Rook, senior clinical account executive at myMatrixx, said, “Our data suggests physician dispensers are charging Florida employers nearly three times more on average for a drug dispensed by a doctor’s office compared to states that have restrictions in place.”
Alan Rook, Senior Clinical Account Executive, myMatrixx
Florida’s current policy places most of the burden on the employer or its insurance representative to challenge a drug being dispensed by the doctor’s office. The state provides no relief in the form of utilization management mandates, such as duration of use or days’ supply. “This omission has allowed costs to run out of control and un-challenged leading to employers’ budgets blowing up,” Rook said.
The Florida DWC will host a workshop on November 1 to listen to stakeholders’ concerns and recommendations to correct existing policy.
Right now, Florida is without regulations that are found in many other states that help ensure the safety of physician dispensed drugs and help carriers manage costs. Physician dispensing poses a number of clinical and financial risks to workers’ comp stakeholders. Without pharmacist oversight, an injured worker may risk taking a drug that interacts negatively with their other medications.
“There are states that limit the days’ supply and/or time frame from date of injury wherein a physician can dispense and charge for a medication dispensed from their office. The Florida workers’ compensation regulations do not have these restriction or limitations at this time,” said Kim Ehrlich, vice president of regulatory compliance at myMatrixx.
Kim Ehrlich, Vice President of Regulatory Compliance, myMatrixx
Historically, physician dispensing was utilized for patients who may need only a small supply of a medication or who live in rural areas and may not have access to a local pharmacy. The practice was never meant to replace pharmacies, especially when a patient may be taking a drug for longer periods.
Each state has different laws regarding physician dispensing and a few states ban it outright. Some states limit the supply of drugs that can be dispensed through a physician’s office, while others only allow physicians to administer injectable drugs in their office and bill separately or only allow the practice of physician dispensing in emergencies.
“The physician dispensing regulations differ from one state to another,” Ehrlich said.
When the practice isn’t regulated, physician dispensing can pose a number of clinical risks to workers’ comp patients. The biggest risk associated with physician dispensing is the lack of pharmacist oversight. Providers who treat workers’ comp patients for a particular issue, for example pain caused after a broken arm, are likely not the patient’s primary care physician.
These doctors may be relying on a patient’s account of what they’re taking and could prescribe them a medication without knowing that it may interact negatively with a drug the patient did not report. A pharmacist, on the other hand, would have a detailed record of the prescriptions on file for a given patient.
The importance of utilization management in workers’ comp is imperative. According to the Center for Disease Control (CDC), during May 2020-April 2021, the estimated number of drug overdose deaths in the U.S. exceeded 100,000 over a 12-month period for the first time, with 64% of deaths involving synthetic opioids other than methadone.
“There’s no oversight for that patient to make sure they’re being prescribed medications that are appropriate for them based on their age, their gender and other drugs that they’re taking,” Rook said. “With physician dispensing, the whole oversight process to ensure safety is being taken away.”
Hand-in-hand with these clinical risks are the financial risks for carriers. Within workers’ comp, physicians may dispense drugs at higher prices than they would for group health patients. Physicians often dispense repackaged drugs with average wholesale prices that are higher than those from the original manufacturer, WCRI reports.
“Outside of a workers’ comp or liability claim, when a patient goes to a physician’s office, any medication received there is typically a sample. It’s generally something to take home for a short duration or just to get started before you get your medications from the pharmacy,” Rook said.
Since physician dispensing is currently outside of the PBM pharmacy network, the physician-dispensed medication is adjudicated retrospectively. This means the patient already has the medication, making it much harder to affect change in therapy when the patient is already taking the medication.
“We perform physician outreach to the doctors alerting them that we would like them to go through the pharmacy benefit management processes to ensure proper oversight with regards to safety,” Rook said.
Ehrlich also pointed to well-tested solutions like utilization review and state mandated drug formularies to help keep costs down and to protect injured workers.
“The goal isn’t to get rid of physician dispensing in Florida, but to focus on the safety of injured workers while also addressing inefficiencies within the system and processes,” Ehrlich said. “It’s vital for carriers, TPAs and employers to share what’s occurring with patients when it comes to the safety of injured workers.”
All tools available to PBMs are retrospective concerning physician dispensing. Therefore, in order for real change to occur, the state has to modify or change the policy, which will provide better guidance to employers and their representatives and is enforceable. This is why the November workshop is important for stakeholders to attend and share their concerns and recommendations with the state if change is desired.
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This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with myMatrixx. The editorial staff of Risk & Insurance had no role in its preparation.
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