TCH: Consumers Want Bank Stablecoins but Regulators Block the Path

FTX’s meltdown and crypto’s whipsaw gyrations continue to shake retail investors, many of whom will be wiped out. Institutional investors are shying away from the space, writing down their FTX investments to zero. Hackers have siphoned hundreds of millions of dollars from the paralyzed exchange.

Rob Hunter, deputy general counsel and director of regulatory and legislative affairs at The Clearing House (TCH), told Karen Webster that there’s an antidote to the disasters that have been a hallmark of the crypto landscape: Bank-issued stablecoins.

Consumers want them. National banks — among the most trusted providers in financial services —  are willing to step up and issue them. But federal regulators are standing in the way.

Ironically, regulators themselves, including the Office of the Comptroller of the Currency in 2020, have long publicly acknowledged that banks have the legal authority to issue the coins. More recently the President’s Working Group on Financial Markets released a report stating that the only appropriate issuers for stablecoins should be insured depository financial institutions.

Since then, there’s been little to no movement.

“The regulators promised a crypto sprint, and really what we’re getting is a crypto slow walk,” Hunter observed.

The conversation came against the backdrop where last week — coincidentally right as FTX was blowing up — TCH noted in a whitepaper that banks have been “precluded” from issuing stablecoins.

As a result, according to the paper, stablecoins have been “solely in the hands of entities that are not subject to the full range of capital, liquidity, cybersecurity and other safety and soundness and customer protection requirements applicable to federally regulated banks.”

Hunter noted that right now, as private firms jockey to bring their own stablecoins to market, there’s a patchwork of money transmitter laws in place, with requirements varying from state to state.

The banks have effectively been left in limbo because stablecoin approval has yet to be granted on a bank-by-bank basis. And, Hunter added, while it is believed that a number of FIs have applied to issue stablecoins, there have been no public statements of approval granted.

It is the consumers and the financial ecosystem at large that lose out. The banks’ stablecoin approaches, he said, would be markedly different from the coins being issued by non-banks and would come with the full range of banks’ regulatory and supervisory frameworks that help to ensure safety and soundness.

“There’s no reason why banks shouldn’t be allowed to use a new technology to perform functions that are clearly within the business of banking itself,” Hunter said, “functions like deposit taking and transferring value that banks have been doing for hundreds of years.” Banks could also operate transfer systems for those tokenized deposits. Efforts such as the USDF Consortium, a group of nine FDIC-insured banks that have gotten together to facilitate the compliant transfer of value on blockchain (though focused on business, not consumer-facing transactions) show that the FIs want to be prepared to get up and running and be responsive to market needs.

“They want to engage in this activity,” he said of the banks’ stablecoin intentions, “but they don’t appear to be able to get the regulatory approval. It’s anybody’s guess as to why that is.”

Room for Coexistence

Asked by Webster whether there’s room for banks and non-banks to issue stablecoins, Hunter speculated that it’s conceivable an appropriate regulatory and supervisory framework could govern all issuers.

“But what you don’t want is one set of protections that apply to insured depository financial institutions and a completely different, much less valuable set of protections that apply to the non-bank world,” he cautioned.

It’s conceivable that non-banks might be required to effectively become banks, and subject themselves to the same regulatory structure as their national brethren. Or a standard, federal framework, as proposed by U.S. Rep. Patrick McHenry, R-N.C., could define the mechanics of stablecoins, their utility and purpose, and provide regulation and oversight.

No matter what paths are taken, Hunter said that digital assets need to be “a regulatory priority” for the supervisory agencies.

Looking ahead, he said, the hope is that the TCH whitepaper will help spur the agencies to allow banks to participate more fully in the stablecoin space — sooner rather than later.

“Banks have a lot of experience implementing new technologies,” he told Webster, “and they have experience with risk management — and they can bring all of this to bear in a way that non-banks really don’t and can’t do.”