Banking Agencies Looking at Impact of Crypto-Assets

Last week the Federal Reserve, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency issued a Joint Statement on Crypto-Asset Policy Sprint Initiative and Next Steps. The joint statement highlights the current activity by the agencies to understand the impact of crypto-assets on insured depository institutions and the areas the agencies are reviewing for possible future guidance or regulation. John and Elliot discuss some of the key elements of the report, including the need for a common understanding of what crypto-assets are and how they may impact bank capital.  

Banking Agencies Looking at Impact of Crypto-Assets TRANSCRIPT

John Byrne: Elliot, how are you doing?

Elliot Berman: I'm good, yourself.

John Byrne: Really good. My middle daughter, Melissa, is getting married on Saturday, the formal ceremony, because of the COVID last year we had to be fairly reduced. So we're very excited about that. So a great week.

Elliot Berman: Yeah, I hope it goes well. I know it was bumpy last year, but this year, hopefully, we'll be able to sneak it in before we have to react to Omicron.

John Byrne: Exactly. Exactly. So, Hey, late last week, something I think is sort of unique, a little understandable. There was a joint statement issued by the FDIC and the OCC on crypto-asset policies. They call it a sprint initiative. So basically, there was a series of interagency, what they're calling policy sprints, looking at crypto assets, where staff got together with the folks that had relevant subject matter expertise and looked at sort of issues related to crypto-assets.

They talk about some of the things they are reviewing and [the] next steps. I think they're doing this for two reasons. The first is obvious. Crypto is in the news [and] in the trades. There's a, you know, concern, confusion. So it makes sense, obviously, that the agencies are engaged in reviewing this.

Secondly, I think we're looking, you know, we're spending time on this. So in case you were wondering, we're not asleep at the switch. So I think they're sort of reminding people because as you read through some of the things that they're looking at, [it's] pretty complicated. This is in all the years that we both have been doing agency reviews and working with regulations.

It's pretty unique to say we're putting out a statement on things that we're currently working on. So I think they're trying to quell any sort of confusion in the marketplace and in our community that, hey, who's doing something here showing that there's a series of things that they're reviewing.

Elliot Berman: Yes. I agree. I saw that. I agree with you that it is a little bit unique and the nice part about it, I think, for practitioners and for members of the community, is they're calling out some big picture things that they're working on so that people can start to see a direction. So they call it out three major themes.

One is that they're working on a commonly understood vocabulary so that when people talk about crypto assets. That everybody understands what everybody's talking about because I think there's a lot of terminology that's flying around that people have their own interpretation, but don't necessarily know if the person who's saying it is saying the same thing they're thinking of.

Secondly, they're looking to key risks, which is not surprising because, you know, in the end, these are safety - these three agencies have responsibility for safety and soundness. Related items because they are regulators of insured depository institutions. And third, they're looking to see how the existing regulations and guidance in a variety of areas apply to these types of assets and where there's [a] need for more regulation, clarification, more guidance, that kind of thing.

So I think those are [the] three big picture areas that are, I would say, the right ones for them to be looking at. But they've called those out explicitly.

John Byrne: Right. And they talked about, you know, what's going to happen in 2022. And he said, based on everything, you just referenced the need for, as they're calling it public clarity, they say in 2022, we're gonna move toward that clarity. Specifically on whether certain activities

related to crypto-assets are legally permissible by banking organizations and what are the expectations? And some of the things that we care about [are] safety and soundness compliance with existing laws and of course, consumer protection with a whole series of things. So and they do reference stable coins as well. So, you know, sort of giving us a roadmap of what to expect, not with timelines, but that throughout all of 2022, they'll be working on these things.

Elliot Berman: Yeah. The other thing that I thought was interesting and it's near the end of this relatively short release. They talked about the fact that another thing they are going to look at is how bank capital and liquidity standards [are] applied to crypto-assets and in collaboration with the Basel Committee on Banking Supervision. I think that while that's maybe not something that a lot of our colleagues in the compliance community focus on from a safety perspective. How you evaluate the risk of any particular asset class and then how you allocate your capital to that asset class really is at the foundation of financial soundness.

So that will be very interesting, probably a little off-topic for our audience. For those of us who've been in banking for a long time, most problems end up rolling back up to what's the capital implication.

John Byrne: Right? And so November 23rd, 2021 joint statement, a crypto-asset policy, sprint initiatives, and next steps FDI and OCC. You can find that on any of their websites.

Elliot Berman: Yes, and we'll put a link in the posting for this. So I'm going to do the shameless plug. So if you like this one, please tune in every week and listen to us. You can find us on Spotify, Apple Podcast, or wherever you get your podcasts, and John, I'll let you do the other, plug.

John Byrne: So let me do two quick ones. On December 16th, we have a human trafficking update for [the] 2021 webinar. That'll be one o'clock Eastern time. It's an excellent panel [that] will be moderated by our colleague, Joe McNamara, and you'll get updates on a series of things going on in that space. We will be posting shortly an interview that I recently did with the IRS CI chief, Jim Lee.

An interesting conversation with Jim about, as we talked about last week on This Week in AML, the annual report, the 2021 annual report from IRS CI. Jim goes into detail on some of the issues there, and I think you're going to find that both compelling and insightful. So look for that shortly on our website, not on social media.

Elliot Berman: Okay, John. Thanks a lot. I'll talk to you next week and enjoy your travels, and congratulations to you and the family.

John Byrne: Thank you. We'll talk next week. Take care.

Elliot Berman: Yep. Bye-bye.