Banks Unprepared for Crypto-Powered Payments

If you’ve been following the regulation of cryptocurrency and the FinTech companies that use it, you probably won’t be surprised to learn that a lawyer for a FinTech-focused venture capital firm considers U.S. policy to be incoherent.
While the first serious step towards regulation at the federal level came on Nov. 1 — when the President’s Working Group on Financial Markets released a report on a regulatory framework for stablecoins — Tom Brown, general counsel for Nyca Partners, was not impressed with the results.
What he saw “is more a turf battle than a coherent articulation of policy,” Brown said, “and that’s just with respect to stable coins. If you step back and look at the broad sweep of digital currencies there is no clearly articulated administration policy.”
Discussing an article that will appear in the December issue of the TechREG Chronicle, Brown told PYMNTS’ Karen Webster that the real problem isn’t just legislative grid lock. Rather, it’s that the U.S. system for regulating financial services “is set up to regulate institutions, not activities.”
As a result, regulators tend to be siloed, concerned not about the overall impact of the services to be regulated, but how they will impact the set of institutions which their agency oversees. That makes them not just short-sighted but grabby, Brown 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.”
But when you have a technology like cryptocurrency cuts across all of those domains, Brown said, “The natural impulse on the part of the agency is to think, ‘Well, because this technology is impacting my constituents, I must own it and control it.’”
That’s true even though the scope of crypto’s impact is not confined to the industries that agency oversees, he added.
As Brown sees it, the bigger problem is that those systemic roadblocks are compounded by the more immediate ones presented by the COVID-19 pandemic.
Simply put, the Biden Administration does not have the bandwidth to spare, even though high-level figures like Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome Powell are growing more interested in — and concerned by — digital assets. These range from cash-replacement cryptocurrencies like bitcoin and utility tokens like ethereum to stablecoins and non-fungible tokens (NFTs).
See also: Treasury Secretary Yellen Says She Hasn’t Decided on Digital Dollar Creation
What’s Next?
That leads to an even broader and longer-term problem in Brown’s mind, as regulators are not preparing U.S. financial institutions for the ebbing of the U.S. dollar as the world’s reserve currency.
“If you think about how real-time payments work in a crypto-enabled world, U.S. financial institutions are just not prepared for the possibility,” he said.
Now, anyone who’s concerned about a market disruption can just say, “I’m going to put my assets in ether and I’ll come back in once I know that it’s all okay,” Brown noted. “That scenario, at least publicly, does not appear to be on the minds of the folks running the Federal Reserve, the Treasury Department, or the various bank regulators.”
Brown added that both the people and financial regulators must be prepared for a world in which funds are moved in real time and dollars matter less.
Handcuffs Before Fines
From Brown’s perspective, any executive at any company that is working in a field in which regulatory guidance is as limited and vague as digital assets must start with one question: Am I getting into an area of law in which getting it wrong could lead to criminal prosecution?
Notably, he points to the Treasury Department’s Financial Crimes Enforcement Network — FinCEN — and its oversight of money transmission. The federal laws related to money laundering and sanctions screening are the place to begin, Brown said, but then there are the states, many of which have their own money transmitter laws.
Adding in a lawyerly way that he is not giving legal advice, Brown said that if someone is dealing with fungible cryptocurrencies that are a cash substitute, “the obligations that exist under the Bank Secrecy Act for transmitters of traditional currencies apply in the criminal context as well if you’re engaged in certain kinds of activities. And so, you need to register.”

About: This report represents the inaugural edition of the TechREG™ Chronicle. The regulation of digital businesses is emerging as one of the signature issues of our times. Through this new publication, we seek to contribute to the debate and discussion over when, how, and when not to regulate digital businesses and the key technologies they use.

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