Cryptocurrency is a recent invention that dates to the release of the original Bitcoin white paper and protocol by the enigmatic Satoshi Nakamoto in 2008. However, in the years since, Bitcoin has steadily expanded from a niche interest into a multi-billion-dollar industry and spawned thousands of new digital currencies along the way.
Today, an increasing number of consumers and businesses seek to use cryptocurrencies for payments or digital asset investments. Yet as the industry matures and intersects with a banking and payments industry developing new faster payment technology, questions remain about what will come next for cryptocurrency and how its evolution will impact, and possibly disrupt, community banks and even national economies. Will stablecoins bring greater stability or create new consequences for banks, governments, and consumers alike?
The Bank for International Settlements defines a stablecoin as a “cryptocurrency that aims to maintain a stable value relative to a specified asset, or pool or basket of assets.”
Stablecoins seek to address and overcome many of the challenges associated with cryptocurrencies, particularly their instability, to create systems that can provide platforms for payments and potentially enable a new generation of “programmable money” that self-executes transactions using smart contracts.
ICBA Comment Letters
There are a few different ways in which stablecoins attempt to maintain a stable value, including pegs to stable national currencies (e.g., U.S. dollar) or backing by real-world commodities like gold or oil reserves.
Several different types of stablecoins exist, such as Tether and USDC, and the market is expanding rapidly. Total transaction volume exceeded $360 billion for the first time in February 2021, and Tether reached a new market capitalization of approximately $30 billion.
However, one stablecoin project that has caught the attention of regulators and central bankers worldwide is Diem, formerly known as Libra.
Diem is a stablecoin project in development by a collection of companies, including Facebook and Coinbase, that aims to establish multiple single-currency stablecoins in an effort to “enable a simple global payment system and financial infrastructure.”
After the project was first announced, central bankers, such as Governor Lael Brainard, cautioned that global stablecoins “could disintermediate the role of banks in payments” and “have implications for the role of central banks and monetary policy.” Additionally, due to their goal of providing cross-border payments, Governor Brainard also stated that “[Diem]’s intended global reach would likely necessitate a consistent global anti-money-laundering framework in order to reduce the risk of illicit transactions.”
Stablecoins may offer new payment capabilities in the future, but those capabilities should not come at the expense of community banks’ vital role in delivering financial services to Americans. ICBA urges policymakers to ensure that stablecoin issuers employ rigorous AML/KYC programs to prevent financial crimes and guard against potential systemic threats to the wider payment and banking systems.
Office of the Comptroller of the Currency:
U.S. Department of Justice (DOJ)
Consumer Financial Protection Bureau (CFPB):
Office of Foreign Assets Control (OFAC):
Cryptocurrency and Financial Crime
Policymakers, regulators, and law enforcement authorities have significant concerns about the use of cryptocurrencies for illicit activities, including money-laundering, sanctions evasion, and ransomware.
Calculating the total dollar amount of crypto-related crimes is difficult, but FinCEN reported in December 2020 that it received “approximately $119 billion in suspicious activity reporting associated with [cryptocurrency] activity taking place wholly or in substantial part in the United States” in 2019. Moreover, FinCEN indicates that this amount equaled almost 12 percent of all cryptocurrency transactions “being relevant to a possible violation of law or regulation.”
Additionally, consumers and businesses are frequent targets of a variety of scams and other financial crimes, such as ransomware and hacks of cryptocurrency exchanges.
Consumers have an acute risk from crypto-related scams and crimes because cryptocurrencies lack protections afforded under U.S. laws and regulations. For example, cryptocurrencies are not covered by Regulation E, the primary regulation that establishes processes to dispute unauthorized transactions and for financial institutions to resolve those claims. Unfortunately, if a criminal can access a consumer’s cryptocurrency, the funds will likely be stolen and there is little to no recourse to recover the stolen assets.
State and federal regulators and policymakers have recently taken actions to establish more oversight for crypto-related companies and highlight the myriad risks to consumers.
In March 2021, New York Attorney General Letitia James issued an alert advising consumers to “extreme caution when investing in virtual currencies.” The alert warned consumers that digital asset investors may be exposed to risks such as “wild price swings, conflicts of interest among trading platform operators, and increased chances of market manipulation.” These statements followed legal actions by her office to protect consumers with lawsuits against illegal cryptocurrency exchanges.
Community banks and cryptocurrency
Some community banks are starting to explore offering custodial services for digital assets; however, many remain cautious about adopting these services due to a variety of risk mitigation and regulatory concerns.
Early adopters are pursuing a range of crypto-related services, such as custody of digital assets or debit card bitcoin rewards programs. It remains to be seen whether and how quickly other community banks will offer similar services. Nonetheless, there appears to be a growing interest among consumers in not only cryptocurrencies but also greater participation from their banks.
A January 2021 survey by NYDIG, a custody service provider, reveals that 80 percent of Bitcoin holders would move their assets to their bank if it provided secure storage. If this sentiment continues to build, more community banks may choose to offer crypto-related services to meet new customer demands and expectations.
Cryptocurrency and Bank Charters
As cryptocurrency adoption expands, the Office of the Comptroller of the Currency (OCC) and several states are exploring special bank charters to help normalize crypto-related financial services and provide avenues for these companies to access the payment system.
Regulatory Related Links
Commodity Futures Trading Commission:
Securities and Exchange Commission:
Although innovation in financial services can enable new ways for citizens and businesses to engage in transactions and obtain critical services, these innovations should not jeopardize a safe and sound banking and payment system. These new charters for non-bank companies challenge long-standing principles separating banking and commerce and potentially introduce systemic risk into the payment system.
ICBA urges policymakers and regulators to ensure that cryptocurrency companies fully meet the requirements of federally insured chartered banks before granting any charter or access to the Federal Reserve’s payment system.
Against the backdrop of heightened cryptocurrency interest, the digital dollar has now become a “high priority” for the U.S. that would exist alongside the traditional dollar. Central bank digital currencies (CBDC) have risen to prominence for central banks because of their potential to address areas of monetary policy implementation, payment system stability, and financial inclusion.
According to BIS, 80 percent of 66 central banks consulted are carrying out some type of work related to CBDC. Notably, around 40 percent of the central banks have shifted from conceptual research to experimentation and implementation of CBDC. Among the largest, China, Sweden, and France are most far along. Several smaller banks, including the Central Bank of the Bahamas, are even further established in the space.
Source: BIS: https://www.bis.org/publ/work880.htm
Concerns of potential threat and loss of control over the payment system if privately issued stablecoins or digital currencies issued by foreign nations are accelerating U.S. plans.
The Federal Reserve Bank of Boston has partnered with the Massachusetts Institute of Technology (MIT) to jointly build and test a hypothetical digital currency for general purpose use. The preliminary phase is intended to explore the architecture needed for a possible digital version of the U.S. dollar as a medium of exchange. It will examine how to support the scale, security, speed, and other factors necessary for such an endeavor.
The Federal Reserve has also highlighted preconditions needed for a digital dollar that include privacy issues, ease of use, security access, and delivery mechanisms. As the Federal Reserve evaluates creation of a U.S. central bank digital currency, ICBA is urging it to consider a two-tiered model that maintains the existing financial services infrastructure, which preserves the valuable role of community banks.
Wider adoption of cryptocurrency is altering global digital commerce and the global financial system. ICBA has serious concerns regarding threats posed by cryptocurrency to privacy, money laundering, terrorist financing, fraud, consumer protection, and financial stability.
Market Evolution Includes Community Banks
Although cryptocurrencies are still not widely used for payments, more Americans are purchasing cryptocurrencies, contributing to a rise in valuations. The number of Americans who hold cryptocurrencies is difficult to determine given the pseudonymous nature of cryptocurrency; however, recent research by Cambridge University estimates there are 101 million unique users across the world, an increase of 189% over 2019. Some community banks are beginning to explore offering cryptocurrency services to meet customer demand. Numerous financial service providers and fintech companies now offer consumers and businesses access to cryptocurrency-related activities, such as investments, lending, and custodial services.
Limited regulation and oversight applied to the cryptocurrency marketplace and transactions mean that consumers and investors that use or hold cryptocurrency are exposed to significant risks, including highly volatile fluctuations in value. Private stablecoins backed by fiat currencies can pose other threats, including the potential to erode monetary authority and threaten financial stability. Community banks are also at risk of disintermediation if private stablecoins become prevalent.
Money Laundering, Terrorist Financing, and Fraud
Cryptocurrencies have a long history of being used for criminal and illicit activity, undermining law enforcement. Criminals frequently use cryptocurrencies to launder funds, hijack computer systems with malware to surreptitiously mine cryptocurrency, and use cryptocurrencies to facilitate payments for illegal goods and services. Anonymity-enhanced cryptocurrencies, or cryptocurrencies designed to evade scrutiny and cloak users in greater secrecy, are utilized by fraudsters around the world for a variety of criminal actions.
Scope of Regulation
Policymakers are beginning to address the need for greater clarity in cryptocurrency regulations and policies. Any regulatory regime applied to cryptocurrency should be comparable to the multitude of regulations applicable to traditional, functionally similar payments products and services offered by the banking system. Appropriate regulation of participants in the cryptocurrency industry, such as exchanges, should mitigate significant risks. The scope of regulation should include capital adequacy and reserves; activity restrictions; due diligence; information security and privacy; business resiliency, ownership and control of data; anti-money laundering and anti-terrorist financing; reporting and maintenance of books and records; consumer protections; safeguarding customer information; vendor and third-party management; and ongoing examination. Without such a regime, the lack of parity with the banking industry poses a heightened level of risk to consumer privacy, digital commerce, and the global financial system.
U.S. Central Bank Digital Currency
There are more than fifty central banks around the world exploring or piloting central bank digital currencies. As the Federal Reserve evaluates the possibility of creating a U.S. central bank digital currency, ICBA encourages the Federal Reserve to consider a two-tiered model that maintains the existing financial services infrastructure which preserves the valuable role of community banks.
Special Purpose Cryptocurrency Bank Charters
Innovation in financial services offers many benefits to consumers and businesses. However, innovation cannot come at the cost of ensuring a safe and sound banking and payments system. In the past year, several cryptocurrency companies began pursuing bank charters from the Office of the Comptroller of the Currency and from a small, but growing, number of states.
These novel charters for non-banks firms raise a number of regulatory concerns—such as the continuation of the long-standing principle of the separation of banking and commerce, application of traditional banking statutes and regulations governing safety and soundness and consumer protection, and most significantly, the potential introduction of systemic risk into the payments system. ICBA urges policymakers to ensure that cryptocurrency companies fully meet the requirements of federally insured chartered banks before granting any charter or access to the Federal Reserve’s payments systems.