RFC Ensuring Responsible Development of Digital Assets

Department of the Treasury
Natalia Li
Deputy Director
Office of Financial Institutions Policy
1500 Pennsylvania Ave, NW
Washington, DC 20220

Colleagues:

The American Bankers Association (ABA) welcomes the opportunity to respond to the request by the Treasury Department for information and comment concerning the responsible development of digital assets (RFC).

When Executive Order 14067 “Ensuring Responsible Development of Digital Assets” (EO) was released in March 2022, ABA looked forward to continuing its engagement with the Administration, government agencies, bank regulators, and Congress to consider the implications of these important and complex policy decisions. We continue to share the Administration’s interest in responsible financial innovation. Ensuring that consumers, investors, and businesses are protected from the potential financial risks posed by digital assets should be a priority for the government, and we believe that can only be achieved through careful coordination with the private sector, including the banking industry.

Blockchain technology has potential for application in financial services that, over time, may lead to enhanced efficiencies, new products, and new ways to deliver traditional products. The fundamental characteristics of blockchain, including immutability and transparency, are relevant and valued in the financial services market, and many banks are exploring potential uses. Critically, banks are undertaking this research and innovation responsibly and within a regulatory framework that ensures consumer protection and limits systemic risk. The same cannot necessarily be said for non-banks.

The digital asset market includes a range of instruments – from speculative and highly price volatile cryptocurrencies (e.g., bitcoin and ether), to so-called stablecoins that are backed by a collection of assets (e.g., USDC and Tether), to digital representations of customer deposits on a blockchain. Each category of digital asset, and really, each specific token or coin, has unique risk characteristics depending on its issuer and use case. Many of these assets look like traditional financial products, which may create consumer expectations about the protections afforded them and regulations the products are subject to.

Particularly for stablecoins, where the token is marketed as maintaining a 1:1 peg to the US Dollar, the product looks and feels like a dollar in a deposit account with all of the protections that come from FDIC insurance and regulatory supervision of the banking industry. However, we know that is not the case. Non-bank stablecoin issuers are not subject to a comprehensive regulatory framework, and consumers who choose to purchase these stablecoins are subject to the credit risk of the issuer. While banks are also subject to credit risk, the combination of FDIC insurance and comprehensive supervision ensures appropriate risk management that protects consumers’ deposits.

The digital asset marketplace is changing rapidly. When the EO was released, the total market capitalization of all cryptocurrencies (including stablecoins) was around $2 trillion, down from its peak of over $3 trillion reached in November 2021. Since then, the digital asset market has continued to lose value (~$1.1 trillion as of July 29, 2022), and many consumers and investors have lost considerable savings. Some crypto companies have suspended the ability for consumers to withdraw their funds and ultimately filed for bankruptcy, calling into question whether those consumers will ever be made whole. In at least one insolvency proceeding of a non-bank, the court has made a preliminary decision to treat customer assets as property of the bankrupt estate available for satisfaction of claims of general creditors. In connection with another insolvency, concerns have been raised with regard to misrepresentation as to whether customer cash deposits were FDIC insured and under what conditions that FDIC insurance would apply. Other crypto companies have sought emergency loans to stay afloat. What all of these crypto companies have in common is that they are not subject to consolidated federal regulation and supervision. The risks these non-banks’ unregulated operations pose to consumers have become clear.

We are concerned that very little activity seems to have been undertaken since the EO was issued to rein in these non-bank crypto companies. At the same time, bank regulators have taken a very cautious approach, instructing banks to seek formal non-objection to any activities in the digital asset market.

The combination of these two approaches – inaction on the one hand to bring into the regulatory perimeter non-bank crypto companies, and limitation on the other of banks’ ability to engage responsibly in the digital asset market – creates an environment that makes it nearly impossible for responsible financial innovation to occur in this space, causing it to remain in the Wild West.

Digital assets have the potential to be a catalyst for change in traditional financial markets, with significant implications for our financial system, economy, markets, and most importantly for the American consumer. Banks are actively evaluating ways to compete safely and responsibly in the digital asset market, and we look forward to working with all stakeholders to ensure that outcome.

Below we respond directly to several topics posed in the RFC. In addition, please see the following statements and comment letters ABA has previously submitted on digital assets, which are applicable to the RFC.

Download the comment letter to read the full text.