Major US banking regulators waited three days after New Year’s Eve to set off fireworks. Their news release could mark the beginning of an exciting new phase in the evolution of digital asset markets.
The three major banking regulators are the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC). According to their statement, “It is important that risks associated with the crypto sector that cannot be mitigated or controlled do not migrate into the banking system.”
This release marks an important milestone in the embracing of digital assets by banking regulators as the industry is still immature. Recognizing and enumerating the risks from digital assets is an important first step in preparing for an effective regulatory environment.
The key risks highlighted in the report may have been drawn from major publication headlines from the past few months and represent an excellent summary of current deficiencies within the industry. Viewed, this list also provides a roadmap for how to overcome current problems to realize the benefits and potential of digital assets.
About half of the risks are related to the behavior of current industry participants. Concerns about shady and non-standard practices are certainly legitimate, and judging by industry bad guys alone, perhaps the list can be taken at face value as an indictment of the industry.
However, such a simple analysis ignores reputable operators. The digital asset industry has participants who want to do what is right and who want to operate according to the standards of the financial industry. Headlines are full of lewd details of people doing bad things, but what about people who believe in the future and build solid businesses?
The regulator’s statement should give hope to fair operators and industry participants. Clearly the authorities are aware of the problem and are working towards a solution.
Banking regulators have warned that “issuing or holding as a primary crypto asset is very likely to conflict with safe and sound banking practices.” This seemingly simple statement carries much more weight than its face value.
Issuing or owning crypto assets is essentially prohibited throughout this release, as banks must operate in a “safe and sound” manner.Banks Shouldn’t Own Bitcoin
While this in itself is consistent with existing regulations that limit bank ownership of highly volatile investments such as common stocks, it means that not all commodities are the same. Both Bitcoin and the Euro are accepted commodities and both are currencies of sovereign nations. Banks can own Euros, but not Bitcoin, the legal tender of El Salvador. So, as the analysis evolves, banking regulators will adjust their rules to take into account that ownership of designated products has different risk profiles than other digital assets.
Another area that needs further development is stablecoins. In November 2021, the President’s Task Force on Financial Markets, the FDIC, and the OCC issued a report on stablecoins, recommending that stablecoins be issued by insured depository institutions, also known as banks. . Why was recommended for bank issuance changed to prohibited?
It is clear that stablecoins that are not 1:1 backed are not stable. Clearly, market participants and U.S. regulators should not trust coins issued through entities other than well-controlled issuers with audited balance sheets or through unregulated foreign entities. So what is the recommended path for stablecoins? Perhaps in the next release the regulator will address this issue.
If the existing digital asset industry is in turmoil, and banking regulators believe this to be the case, perhaps the best solution is to shift some of their activities within the boundaries of well-regulated financial institutions. For commodity digital assets, how about adopting a similar mechanism as forex products where banks and the Commodity Futures Trading Commission (CFTC) work together?
Who better to lead in digital asset commodities than a bank that knows how to comply with financial rules and regulations? , the United States has a well-deserved reputation for safety. Investors and industry players will benefit from strong leadership in this area by banking regulators.
Digital assets are not going away, and despite a year of failures and scandals, the sector is still thriving. Long-term planning is clearly appropriate. Banking regulators are eyeing the industry and participants should appreciate their attention.
The U.S. financial system benefits from a robust regulatory framework, making it the envy of the world. Perhaps the joint statement from banking regulators was a signal that they were preparing to introduce a robust regulatory regime for the digital asset class. It will be exciting to see if banking regulators prepare more fireworks for the digital asset community.