As efforts to pass federal cryptocurrency legislation finally gain momentum in Washington, so does a debate over how traditional banks should enter the industry.
A group of progressive senators, including Elizabeth Warren and Bernie Sanders, are calling on federal banking regulators to repeal the limited Trump-era mandate given to banks to do cryptocurrency-related business.
In a letter to the Office of the Comptroller of the Currency on Wednesday, the senators sparked an ongoing debate about the role banks should play in the cryptocurrency ecosystem. Regulated institutions can bring stability to a volatile industry, banking groups say. But lawmakers fear that without strict protections, cryptocurrencies could pose systemic risks to the broader banking system.
“Given the recent volatility in the cryptocurrency market…we are concerned that the OCC’s conduct regarding cryptocurrencies could expose the banking system to unnecessary risk,” the letter was also signed by Sens. Sheldon Whitehouse and Dick Durbin.
Warren circulated a draft of the letter before the Senate Banking Committee last week, Bloomberg and The American Banker reported. The letter asks the regulator to withdraw its previous guidance and begin a more comprehensive process “to adequately protect consumers and the safety and soundness of the banking system.”
The OCC’s current guidance is published in late 2020 and early 2021. It empowers the Commonwealth Bank to provide cryptocurrency custody services, maintain stablecoin-backed cash reserves, and use blockchain technology and stablecoins to verify bank-to-bank payments.
When asked about the letter, an OCC spokesperson sent the protocol on Tuesday earlier comments from acting OCC head Michael Hsu describing the agency’s “cautious and cautious” approach to cryptocurrencies.
When the agency reported on August 3 that Warren was circulating a letter urging the OCC to withdraw its guidance, Xu defended the agency’s approach in comments to Bloomberg.
“I think we’re doing well. Look at Exhibit A: A bunch of things have just happened, the banking system is in good shape, knocking on wood. I think part of that is the actions we’ve taken,” Hsu told Bloomberg.
The senator cited the bankruptcy of Celsius and Voyager, companies that operate cryptocurrency lending businesses that operate outside the scope of the OCC. Still, the bankruptcy case demonstrates “the need for stronger protections to mitigate the risks that cryptocurrencies pose to the financial system and consumers,” the letter says.
Hsu describes himself as a cryptocurrency skeptic and has promised to revise the cryptocurrency-related guidelines when he takes over the leadership of the OCC in May 2021. The guide was published by Hsu’s predecessor, Brian Brooks, who is now the CEO of cryptocurrency company BitFury.
The agency said in November that it would maintain these rules, adding that banks must apply to the OCC without objection before engaging in any cryptocurrency activity.
However, in the senator’s view, the change is not enough.
Inaction vs. Limitation
A banking trade group recently argued that restricting banks’ involvement in cryptocurrencies is counterproductive to protecting consumers. The American Bankers Association said in a letter to the U.S. Treasury Department on Monday that banks are facing restrictions that limit their exposure to digital assets, while there is still little oversight of non-banks involved in cryptocurrencies.
Banks are not giants, and some are more skeptical of cryptocurrencies than others. Some institutions have explored the use of blockchain technology to solve problems such as remittances. Some are offering custodial services to cryptocurrency companies for crypto assets or customer funds.
When asked about the letter, the OCC’s cryptocurrency custodian, Anchorage Digital, said that lawmakers should focus on bringing more cryptocurrency businesses onto the regulator’s radar.
“If we really want to protect consumers, we need to create a viable path for regulated institutions to offer crypto services, and that’s what the OCC’s guidance is designed to do,” said Georgia Quinn, Anchorage’s general counsel.
Warren has certainly expressed support for tighter regulation of cryptocurrencies as a whole. But consumer advocacy groups, generally aligned with Warren, have listed cryptocurrencies in conventional banking as a particular concern. Beyond current guidance, they said, clarity is needed.
“We really don’t understand how banks are exposed to crypto risk or how regulators assess it,” said Mark Hayes, senior fintech policy analyst at U.S. Financial Reform. “Given the recent collapse, we should and would be better off if regulators started from first principles and applied the full suite of banking supervision from the beginning, rather than taking the ‘maybe, maybe not’ approach that is currently in play.”
What’s next
The senator’s letter asks the OCC to file a new lawsuit against the FDIC. and the Federal Reserve to clarify how the banks they regulate use cryptocurrencies. The letter also includes a series of questions about how many OCC-regulated banks are involved in cryptocurrency activities.
The OCC, FDIC and Federal Reserve issued a joint statement late last year promising to provide banks with clearer information about cryptocurrencies by 2022 – but guidance has been limited since then. The FDIC recently released a statement warning banks that they should monitor how the cryptocurrency companies they work with advertise the availability of deposit insurance. This concern, combined with Warren and Sanders’ concerns, may be a sign that more action is on the horizon.
In addition to Biden’s executive order, the Senate has several bills aimed at regulating various parts of the industry, including one introduced in early August that would give the Commodity Futures Trading Commission greater oversight of the industry. While the banking industry is not the focus of these bills, they could help influence how banking regulators handle cryptocurrencies.
“It would be very helpful to clarify what is a security token and what is not a security token,” said Gary DeWaal, chair of the financial markets and regulatory practice at Katten Muchin Rosenman LLP. We have everything working at the federal level. A major regulator, you’ll have better regulatory standards, better cybersecurity standards – that will benefit banking regulators as well.”
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