Digital Assets and Cryptocurrency

Position

  • ICBA has serious concerns regarding threats posed by cryptocurrency to privacy and to consumers, and financial stability resulting from increases in money laundering, terrorist financing, and fraudulent activity.

  • Unregulated cryptocurrency threatens to disintermediate community banks and undermine their ability to provide funding to support local economic activity, growth, and development.

  • Cryptocurrencies have a history replete with volatile price swings, hacks, and exploits. ICBA cautions policymakers that strategic reserves of cryptocurrencies may lose value and lead to unknown risks for the US economy.

  • ICBA urges policymakers to ensure public trust by fostering collaboration between domestic and international regulatory authorities to mitigate risks as the adoption of cryptocurrency continues to increase.

  • ICBA supports ongoing efforts by policymakers to harmonize regulations to ensure strong, clear, and consistent oversight of cryptocurrency service providers and establish guidelines for any permissible activities by banks.

  • ICBA believes most cryptoassets are likely offered and sold as unregistered securities. Therefore, crypto entities should be subject to relevant securities laws and regulations. ICBA supports the efforts of the U.S Securities and Exchange Commission to apply the securities framework to cryptoassets and related entities.

  • ICBA urges policymakers, regulators, law enforcement, and national security organizations to coordinate their efforts to combat ransomware and prevent bad actors from using cryptocurrencies for illicit activities and investment scams.

  • ICBA encourages regulators to collaborate on a comprehensive approach to prevent the rise of decentralized finance (DeFi), a shadow banking system filled with unregulated, decentralized platforms that pose risks to consumers, the financial system, and U.S. national security.

  • Stablecoin issuers should not have access to Federal Reserve master accounts or the payments system.

  • Special purpose bank charters or similar alternatives should not be granted to crypto entities that do not fully meet the requirements of federally insured and supervised chartered banks.

  • Regulatory frameworks must establish strong federal oversight for stablecoin issuers to prevent a regulatory race to the bottom.

  • Any regulatory or supervisory regime applicable to nonbank issued stablecoins should be comparable to a functionally similar product offered by a bank or other traditional financial services provider. This will ensure risks created by loosely regulated nonbank firms do not spill over into the traditional banking system.

  • The separation of banking and commerce must be preserved by ensuring commercial firms are not given the significant power of issuing private currency.

  • ICBA is concerned about the potential development of state-issued stablecoins that could negatively impact deposits at community banks, thereby harming their ability to provide credit to their communities. If states create new forms of money or payment systems, the U.S. financial system could experience significant fragmentation, threatening financial stability.

  • ICBA urges policymakers to engage with community banks as the Federal Reserve begins to explore new tokenization systems.

Background

The cryptocurrency industry has demonstrated continued growth despite large-scale malfeasance and lawsuits against significant players. Community bankers remain concerned about the risks presented by digital assets, including rampant investment scams and a lack of strong consumer protections and regulatory oversight. In particular, bankers are becoming increasingly concerned about the growing potential of digital assets to jeopardize the financial stability of the traditional banking sector.

Bankers remain unconvinced that stablecoins are the “silver bullet” for cross-border payments. In fact, the global financial system may be disrupted if stablecoins become widely adopted for payments. ICBA urges policymakers to develop a consistent regulatory framework for stablecoins that addresses the risks they pose to the wider financial system, establishes strong federal oversight to prevent charter arbitrage, preserves the separation of banking and commerce, and ensures that issuers do not have access to Federal Reserve master accounts. Addressing these complex issues will require collaboration with international partners to resolve critical regulatory, legal, technical and governance questions.

DeFi, a growing ecosystem of financial applications that run on public blockchains, also threatens to disintermediate community banks and create a shadow banking system filled with unregulated platforms that pose risks to consumers, the financial system, and U.S. national security. Any regulatory regime applied to cryptocurrency should be comparable to the multitude of regulations applicable to functionally similar products and services offered by the traditional financial system.

Cryptocurrencies also have a long history of being used for illicit activities. North Korea continues to steal and launder billions of dollars’ worth of cryptocurrency to circumvent U.S. sanctions and advance its weapons of mass destruction program. The broader use of cryptocurrency, without accompanying regulation or oversight, allows financial crimes and threats to national security to proliferate. Therefore, protecting national security and implementing anti-crime measures should be primary drivers of cryptocurrency policymaking and regulation. ICBA strongly supports regulatory efforts to curtail the use of cryptocurrency mixers and anonymity-enhanced cryptocurrencies.

News Updates

Fed updates policy on supervising stablecoins, novel activities

Aug. 09, 2023

The Federal Reserve Board released additional information on its program to supervise novel activities in the banks it oversees, including stablecoin activity.

Novel Activities: The Fed board said:

  • Novel activities include complex, technology-driven partnerships with nonbanks to provide banking services to customers as well as activities that involve crypto assets and distributed ledger or "blockchain" technology.

  • The goal of the novel activities supervision program is to foster the benefits of financial innovation while recognizing and appropriately addressing risks to ensure the safety and soundness of the banking system.

  • The program will be integrated into the Fed's existing supervisory processes, with program experts working alongside current supervisory teams to oversee banks engaged in novel activities.

Token Safeguards: The Fed board also provided additional information on the process for a state bank supervised by the Fed to follow before engaging in certain dollar token or stablecoin activity, including demonstrating to its Fed supervisors that it has appropriate safeguards to conduct the activity safely and soundly.

Fed Policy Statement: The Fed said the announcements are in line with its January policy statement clarifying that its regulatory limitations apply to both insured and uninsured depository institutions. That policy statement also said crypto activities—such as issuing stablecoins on decentralized networks—are “highly likely to be inconsistent with safe and sound banking practices.”

PayPal Stablecoin: The Fed release follows this week’s announcement from PayPal that it is entering the stablecoin market. PayPal said its PYUSD stablecoin is based on the Ethereum blockchain, will be available via the PayPal app and website, and will be compatible with other third-party payment services, such as Venmo.

Custodia Denial: The Fed in January denied special-purpose depository institution Custodia Bank’s application to become a Fed member and to have a master account with the Kansas City Fed. ICBA commended the Fed’s response to the Custodia application in a national news release, saying the agency’s actions appropriately safeguard the banking system from the risks posed by institutions with novel charters and the crypto sector.