Regulators Focus on Crypto, Hoping to Avoid Another Post-Crisis Reckoning

In its Semiannual Risk Perspective report, the Office of the Comptroller of the Currency (OCC) elevated digital assets in the banking sector to one of four key operational risks the banks it oversees are facing.

While that’s noteworthy in and of itself, it’s a proactive step to regulate cryptocurrency and stablecoins before they turn into the threat to the banking and financial system of not just America but the entire world that many financial experts believe they are.

Read more: ECB President Warns Stablecoins Could ‘Threaten’ Monetary Sovereignty

And that’s noteworthy because historically, American financial regulation is a study in closing the stable door after the horse has escaped.

See: US Eyes ‘Regulatory Perimeter’ For Cryptos, Report Says

Most recently, the risk management-focused Dodd-Frank Act added hundreds of new rules and established the Consumer Financial Protection Board as it sought to clean up the mess that allowed the 2008 sub-prime mortgage crisis to slap the economy down into a severe recession. But examples date from 1791’s creation of the First Bank of the United States to the National Banking Act of 1863, which ended the crises of the “free banking” era in which state-chartered banks issued their own currencies by establishing federally charters. Among other things, it created the Office of the Comptroller of the Currency (OCC) to issue and regulate those charters

Details: US Treasury’s Janet Yellen Presses For Stablecoin Regulations

So in elevating crypto’s threat level in the Dec. 6 report, Acting Comptroller of the Currency Michael Hsu is doing something he — and officials ranging from Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome Powell on down — are hoping will let them get out in front of a crisis for once.

Also read: European Central Banks Demand Strict Cryptocurrency Regulations

In this, U.S. regulators are not alone. Proactively regulating cryptocurrencies is an increasingly popular trend around the world, and it ranges from the EU’s aggressive pursuit of preemptive regulation to India talking about following China’s lead in banning crypto outright.

Related: India Again Announces Plan to Ban Cryptocurrencies as Digital Rupee Moves Ahead

States’ Rights

While it didn’t add anything new to recent announcements that in 2022, Hsu’s office is teaming up with the Federal Reserve and the FDIC — an agency created in the wake of the Great Depression — “to provide greater clarity on whether certain activities related to crypto-assets conducted by banks are legally permissible and to provide expectations for safety and soundness, consumer protection, and compliance with existing laws and regulations,” the announcement was a declaration of intent.

The agencies hope to establish rules on issues like crypto custody, helping customers buy and sell digital assets, crypto asset-back loans, issuing and using stablecoins and banks holding crypto assets on their balance sheets.

Also read: As Crypto Firms’ Ambitions Grow, so Do Calls for SPDI Charters

That’s met with some opposition, notably Wyoming Sen. Cynthia Lummis’ attempt to block the reappointment of Federal Reserve Chairman Jerome Powell for — does this sound familiar? — what she called the central bank’s illegal delay in approving the state-issued SPDI charters that would give crypto companies permission to act as banks for things like custody services and providing crypto owners an on- and off-ramp between their digital wallets and bank accounts.

On the other hand, Powell recently supported Sen. Lummis on state bank-issue stablecoins, calling Yellen’s position that the dollar-pegged cryptocurrencies should only be issued by federally chartered banks “perplexing.”

See more: Powell, Yellen Clash Over Stablecoin Regulation at Senate Hearing

Miles to Go

Talking about regulation is one thing. Doing it is another, and not everyone is impressed by the oversight agencies’ attempts at regulation.

One of the highest-level, multi-agency attempts to bring about a coherent, preemptive, crypto regulatory policy was the Nov. 1 release of the President’s Working Group on Financial Markets on stablecoins.

While the idea is good, the results were not, Tom Brown, general counsel for Nyca Partners, told PYMNTS’ Karen Webster recently.

See: Nyca’s Tom Brown: US Banks, Regulators Aren’t Ready for Upheaval of Crypto-Powered Real-Time Payments

The review of stablecoin policies showed “more a turf battle than a coherent articulation of policy,” Brown said, “If you step back and look at the broad sweep of digital currencies there is no clearly articulated administration policy.”

One problem, he said, is that U.S. regulators are focused on regulating “institutions, not industries.” That leaves their focus narrowly on how cryptocurrencies will affect their turf, he argued.

“For the Office of the Comptroller of the Currency, for example, it’s federally chartered banks,” he said. “For the Securities and Exchange Commission, it’s broker-dealers and securities exchanges. For the Commodity Futures Trading Commission, it’s derivatives exchanges. For the Federal Reserve, it’s payments and monetary policy.”