Hello Fintech Friends!

This past week offered a glimpse of what the coming weeks will look like for crypto policy as we move closer to the midterm elections. We are seeing less action on the Hill and more policy updates coming from the executive branch. Crypto policy professionals are making use of this time to catch their breath, exchange ideas at various events happening throughout the month, and gear up for the post-midterm elections policy cycle. Let’s take a quick look at the most recent policy updates.

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1.       Crypto Regulation

Acting Comptroller of the Currency, Michael J. Hsu, delivered important remarks last week on the crypto industry. The acting chair of the bureau responsible for chartering, regulating, and supervising banks argued that “[c]rypto today is an immature industry based on an immature technology.” On the same day, Hsu said that while he is “skeptical of crypto’s real world utility today and hyper-aware of the risks it poses to consumers and the financial system,” he “cannot say with certainty that crypto is useless and should go away.” This is because his role as a bank regulator “is to ensure that the banking system is safe, sound, and fair—not to pick winners and losers among emerging technologies.”

Does crypto threaten the safety, soundness, and fairness of the banking system? Specifically, do the crypto activities of banks pose risks to the banking and financial system? The newly appointed Federal Reserve (Fed) Vice Chair for Supervision Michael Barr answered affirmatively, noting that “[m]any of these activities pose novel risks, and it is important for banks to ensure that any crypto-asset-related activities they conduct are legally permissible and that banks have appropriate measures in place to manage those risks.” When looked at together, the previous statements show that financial regulators are willing to allow traditional banks to engage in crypto activities, but only if certain safeguards are in place, as required by the guidelines the Fed issued last August.

What financial regulators are more reluctant about is giving crypto firms access to master accounts with the Fed, despite the multi-tiered review system the Fed approved last August for the evaluation of crypto firms’ applications for master accounts. Master accounts would allow crypto firms to deposit funds with the Fed, have access to its liquidity, and become officially part of the global financial system. Absent such accounts, crypto firms are forced to have accounts with other banks and abide by these banks’ policies, regulations, and fee structures. In that light, we can understand the lawsuit digital assets bank Custodia filed last week in Wyoming against the Board of Directors of the Kansas City Fed after BNY Mellon, the oldest bank in the country, was allowed to offer crypto custody services to its customers, while Custodia has been waiting for 19 months to receive a response from the Fed to its own application for a master account.

2.       CBDCs

Last week, U.S. Treasury Secretary Janet Yellen made a rare clear statement about the utility of a future U.S. CBDC. Yellen said at the annual meeting of the International Monetary Fund that, while developing a U.S. CBDC may take years, it is “certainly worth getting involved in developing” given the advantages it has to offer. But as we discussed in previous weeks, issuing a U.S. CBDC is vehemently opposed by Republican lawmakers and the vast majority of the crypto industry. It is even opposed by some leaders of the Fed, as was shown last week by the remarks of Fed Governor Christopher Waller who expressed deep skepticism about the need for a CBDC. According to Waller, the absence of a U.S. CBDC does not undermine the role of the dollar as a global reserve currency. Waller added that this role can be supported by stablecoins that are pegged to the dollar.

3.       Blockchain Technology Applications

Despite its complete ban on cryptocurrency, China revealed last week a pioneering example of using blockchain technology in the court system. Local news outlet Rule of Law Daily published a report showing that China’s judicial blockchain platform now has more than 2.6 billion pieces of evidence on the chain that can be used in future litigation. The judicial blockchain platform is run by China’s Supreme Court and serves primarily to connect the blockchains of local courts in China. The Supreme Court hopes to use the platform to connect courts with law enforcement agencies and regulators.

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See you next week!