WASHINGTON — The nation’s top banking trade associations told the Biden administration that its cautious approach to digital assets is stifling the industry, while the broader crypto sector continues to operate with little government oversight.
The comments, in response to a request from the Treasury Department in July, reiterate an argument that banks have made for years: that the highly regulated banking sector is one of the safest places to experiment with crypto, rather than its less-regulated nonbank counterparts.
“The combination of these two approaches – inaction on the one hand to bring into the regulatory perimeter non-bank crypto companies, and limitation on the other of banks’ ability to engage responsibly in the digital asset market – creates an environment that makes it nearly impossible for responsible financial innovation to occur in this space, causing it to remain in the Wild West,” wrote Brooke Ybarra, head of the American Bankers Association’s office of innovation.
Banks are betting their industry’s stricter oversight and stability will appear more enticing for regulators in the wake of the market turmoil that’s wiped a huge amount of value from the crypto sector.
At the same time, however, that caution to date may have played a key role in insulating the traditional financial industry from digital assets’ plunging volatility, analysts say. Balancing the banking system’s more robust supervision against its broader exposure to the U.S. economy will be key as regulators consider just how involved they want banks to be in the potentially lucrative future of crypto.
“There’s money to be made,” said Hilary Allen, a law professor at American University and expert on financial stability. “The banking industry has shown us in the past that it can be very short term if there are profits to be made, even if it’s potentially very destabilizing in the long-term. That’s what we saw in the run-up to 2008, and that’s what I worry about happening all over again.”
‘Extend the existing banking model’?
Banking regulators have, in the past, said that the recent market turbulence has reaffirmed their tepid approach to crypto regulation and banks so far. Todd Phillips, director of financial regulation and corporate governance at the Center for American Progress, said it’s unclear if this crop of regulators will be swayed by the idea that it’s safer for crypto experimentation to happen within the banking system.
“Regulators have been slow and cautious because they’re responsible for protecting the safety and soundness of the banking system, and having the banking system getting involved in crypto could be significantly risky,” he said. “All these hacks, losses and decreases in value, they’re the kinds of things that make bank regulators hesitant.”
But the banking sector maintains that the alternative — allowing non-banks to dominate the crypto sector — could pose clearer and more long lasting damages.
In comment letters to the Treasury Department, advocates for community banks encouraged the nation’s financial regulators to crack down on non-banks in the sector, writing that failure to do so could constitute a national security risk.
“Broader use of cryptocurrency, without accompanying regulation or oversight, allows financial crimes and threats to national security to proliferate,” wrote Brian Laverdure, vice president of payments and technology policy at the Independent Community Bankers of America. “Therefore, protecting national security and implementing anti-crime measures should be primary drivers of cryptocurrency policymaking and regulation.”
But other representatives from the banking sector appeared more bullish about the future adoption of digital assets in the banking system. Rob Morgan, CEO of the USDF Consortium — a group of banks developing policy and technology around a system of “tokenized” bank deposits — argued that “the best way to leverage blockchain technology is to extend the existing banking model into this tokenized environment.”
“If policymakers want to realize the benefits of blockchain technology while maintaining critical protections, they should look to the bank regulatory framework,” said Morgan. “Bank deposits are backed by robust capital and are subject to a regulatory regime that ensures liquidity and solvency.”
Anchor Labs, the company behind the digital asset trust bank Anchorage Digital, told the Biden administration that it expected the demand for crypto-related financial services to grow “rapidly” in the coming years, adding that the firm believes “that digital assets will have a positive impact on equitable economic growth through a key use case where blockchain technology offers efficiency and better pricing, namely payments and remittances,” according to a comment letter written by CEO Nathan McCauley and general counsel Georgia Quinn.
Progressive consumer advocates, meanwhile, remain concerned about the extent of fraud in the cryptocurrency sector and the lack of guardrails for the government to crack down on it to date.
“We urge the Treasury to recommend to agencies a robust regulatory scheme without fear of sparking systemic risk, and with support from consumer protection advocates when it comes to protections for consumers contemplating an investment in assets without true value,” the watchdog group Public Citizen wrote.
Clarity still needed in key areas
The future of stablecoins remains a top concern for many stakeholders responding to the Treasury Department’s request for comment. The ICBA, for instance, encouraged the government to follow through on earlier recommendations that stablecoin issuance be limited to regulated depository institutions. And Paige Pidano Paridon, senior vice president and senior associate general counsel at the Bank Policy Institute, wrote that non-bank stablecoin issuers using riskier funding sources for their reserves — such as commercial paper — may be deceiving their customers about “the safety of these products.”
Even Anchorage Digital encouraged the Biden administration to develop a regulatory framework for stablecoins as soon as possible: “To date, the U.S. government has yet to define exactly what a stablecoin is, and apply adequate regulation to these products and associated services,” wrote McCauley and Quinn.
The crypto bank recommended that non-banks be allowed to offer stablecoins, however, adding that it was in fact “preferable that non-banks issue them because most banks do not have the human capital necessary to issue and maintain the associated networks.”
Several of the commentators complained about a specific bulletin published by the staff of the Securities & Exchange Commission last spring, which outlined the obligations and safeguards that financial institutions will be expected to have when handling a customer’s digital assets in custody arrangements.
The ABA claimed that Staff Accounting Bulletin 121 would effectively “bring the value of cryptoassets a bank holds in custody on behalf of their clients onto the bank’s balance sheet,” making it nearly impossible for banks to hold significant amounts of crypto, according to the comment letter written by Ybarra.
“The attendant consequences of balance sheet recognition for capital, liquidity and other requirements could prevent banking organizations from being able to offer competitive digital asset-related products and services,” Ybarra wrote.
The Bank Policy Institute’s Pidano Paridon said that no other type of asset covered by bank’s custody services was subject to similar requirements, noting that “the custodian has no property right in the asset and no liability in the event of deterioration of the value of the asset or otherwise in respect of the cryptoasset.”
The SEC bulletin was also criticized by Anchorage Digital: “The associated capital costs could be so prohibitive that SEC regulated banks and broker dealers simply would not be able to custody digital assets,” wrote McCauley and Quinn.
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