Banking groups are asking the Biden administration for a bigger crypto role

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, reiterates an argument 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 non-bank 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 nearly impossible for responsible financial innovation to take place in this space, causing it to remain in the Wild West,” wrote Brooke Ybarra, director of the American Bankers Association’s Office of Innovation.

Ken Cedeno Bloomberg News/Bloomberg News

Banks are betting that the industry’s tighter oversight and stability will be more enticing to regulators in the wake of the market turmoil that has stripped a huge amount of value from the crypto sector.

At the same time, however, this caution to date may have played a key role in insulating the traditional financial industry from digital assets’ falling volatility, analysts say. Balancing the banking system’s more robust oversight against its broader exposure to the US economy will be key as regulators consider how involved they want banks to be in the potentially lucrative future of crypto.

“There’s money to be made,” said Hilary Allen, an American University law professor and financial stability expert. “The banking industry has shown us in the past that it can be very short-term if there are profits to be made, although 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 will happen again.”

“Extend the existing banking model”?

Bank regulators have previously said that the latest market turbulence has confirmed their lukewarm 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 whether this slew of regulators will be swayed by the idea that it’s safer for crypto experimentation to happen in the banking system.

“Regulators have been slow and cautious because they are responsible for protecting the safety and soundness of the banking system, and having the banking system involved in crypto can be significantly risky.” “All these hacks, losses and write-downs, that’s the kind of thing that makes bank regulators hesitant.”

But the banking sector argues that the alternative – allowing non-banks to dominate the crypto sector – could pose clearer and more long-lasting damage.

In comment letters to the Treasury Department, community bank advocates urged the country’s financial regulators to crack down on non-banks in the sector, writing that failure to do so could pose 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 Independent Community Bankers of America. “Therefore, protecting national security and implementing anti-crime measures should be primary drivers of cryptocurrency design and regulation.”

But other representatives from the banking sector seemed more optimistic about the future use 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 banking regulations,” Morgan said. “Bank deposits are backed by robust capital and are subject to a regulatory regime that ensures liquidity and solvency.”

Anchor Labs, the company behind digital asset trust bank Anchorage Digital, told the Biden administration that it expected 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 an important 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 scale of fraud in the cryptocurrency sector and the lack of government safeguards to crack down on it to date.

“We urge the Treasury Department to recommend to agencies a robust regulatory regime without fear of triggering systemic risk, and with the support of consumer protection advocates in terms of protections for consumers considering investing in assets with no real value,” wrote the watchdog group Public Citizen.

Still need for clarity in key areas

The future of stablecoins remains a major concern for many stakeholders responding to the Treasury Department’s request for comment. ICBA, for example, called on the government to follow up previous recommendations that the issuance of stablecoin is 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 that use riskier funding sources for their reserves — such as commercial paper — may be deceiving their customers about “the safety of these products. ”

Even Anchorage Digital urged the Biden administration to develop a regulatory framework for stablecoins as soon as possible: “To date, the US government has yet to define exactly what a stablecoin is, and apply adequate regulation to these products and related services,” it wrote McCauley and Quinn.

The crypto bank recommended it non-banks can offer stablecoinsbut added that it was actually “preferred that non-banks issue them because most banks do not have the human capital necessary to issue and maintain the affiliate networks.”

Several of the commenters complained about a specific bulletin published by Securities & Exchange Commission staff last spring that outlined the obligations and safeguards that financial institutions would be expected to have. when handling a customer’s digital assets in custody arrangements.

The ABA argued that Staff Accounting Bulletin 121 would effectively “bring the value of cryptoassets a bank holds in custody on behalf of its customers 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 accompanying balance sheet implications for capital, liquidity and other requirements may 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 the bank’s custodial services was subject to similar requirements, noting that “the custodian has no title to the asset and no liability in case of deterioration in the value of the asset or otherwise with respect to cryptoassets .”

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 hold digital assets,” McCauley and Quinn wrote.