Crypto, banking overlap a focus for DC FinTech Week
Crypto’s recent volatility has put a spotlight on the risks digital assets can pose to banks, according to Michael Barr, deputy chairman for oversight of the Federal Reserve.
“When a bank’s deposits are concentrated in deposits from the crypto-asset industry or from crypto-asset companies that are highly interconnected or share similar risk profiles, banks may experience deposit fluctuations that are correlated and closely related to broader developments in the crypto-asset markets,” Barr said in a Wednesday (Oct. 12 ) speech.
Read more: Crypto deposits pose ‘increased liquidity risks’ to banks: Fed’s Barr
By highlighting the issue, Barr said, the Fed aims to emphasize the importance of understanding the increased liquidity risk certain types of crypto deposits pose to banks.
“Crypto-assets have grown rapidly in recent years, both in market capitalization and in reach,” he said. “However, recent cracks in these markets have shown that some cryptoassets are fraught with risks, including fraud, theft, manipulation and even exposure to money laundering activities.”
Activities related to crypto assets, both inside and outside federally regulated institutions, must include safeguards to ensure that crypto service providers are subject to regulations similar to other financial service providers, Barr added.
“This effort is not intended to discourage banks from providing access to banking products and services to businesses related to cryptoassets,” he said. “Our work in this area is focused on ensuring that risks are properly managed.”
Three lenses
Acting Comptroller of the Currency Michael Hsu said in a DC FinTech Week speech this week that there are three “lenses” through which his office tries to identify risks cryptocurrencies pose to banks, consumers and the financial system.
They integrate crypto and traditional finance, with the immature crypto industry bringing the potential for cross-contamination and systemic risk. Another is data gaps, the banking regulator said, asking for more information on interconnection and exposure between banks and crypto firms.
See: OCC chief Michael J. Hsu says regulators need to monitor 3 risks for crypto
The third, with the crossword-friendly name “skeuomorphism”, means explaining new concepts by comparing them with familiar ones that do not mean the same thing in banking – for example, “depository” and “savings accounts”.
Meanwhile, Hsu told CoinDesk a few days later that part of the problem is that crypto companies are often unclear about what they actually do.
“Part of this confusion is because there are parts of the crypto industry that don’t know what they want to be when they grow up,” Hsu said on Thursday (October 13). Crypto companies “want to be a little bit of everything for everybody. And at some point you have to decide.”
This lack of clarity, he added, makes it difficult for regulators to set clear guidelines for overseeing them.
Hard and ugly
A bill to regulate stablecoins is coming, but it’s going to be difficult and it’s not going to be pretty, the top Republican congressman who negotiated the bill said at a DC FinTech Week panel.
“We agree on all the components of what the asset is,” Rep. Patrick McHenry (RN.C.) said on Oct. 12, according to CoinDesk. “We’ve come up with a pretty ugly baby. It’s a baby, after all.”
The bill would establish ground rules for stablecoins such as Tether’s USDT, Circle’s USDC and Binance’s BUSD, with the primary requirement that any stablecoin must be backed 100% by fiat currency and highly liquid investments such as short-term government bonds.
See also: House bill would ban algorithmic stablecoins for 2 years
While there is believed to be a fair amount of agreement, there are many other areas such as whether state-chartered financial institutions can issue stablecoins, which will be decided in three-way negotiations between McHenry, the top GOP member of the House Financial Services Committee, its chairman, Rep. Maxine Waters (D-Calif.) and the Treasury Department.
