On Friday the Federal Deposit Insurance Corporation (FDIC) said that banks no longer have to request permission to engage in digital assets, rescinding a 2022 notification that was used to block bank crypto activities, as well as using blockchain for payments. However, another document rescinded by the Commodity Futures Trading Commission (CFTC) suggests that there’s a risk regulators go too far in trying to appease the crypto community. Highlighting risks and suggestions on how to handle them should be a positive, provided regulators don’t attempt to block activities when the risks are adequately addressed.
Stepping back, the recent release of FDIC documents under a freedom of information request that was litigated by Coinbase, have shown that banks did not just have to ask permission from the FDIC, but were positively dissuaded from engaging in activities involving cryptocurrency as well as blockchain transactions that did not use crypto. The FDIC’s move aims to draw a line on that. It also responds to a request from banking associations to address the permission issue.
That said, there is a reasonable caveat that all activities should be conducted in a safe and sound manner. The FDIC also said it was reviewing two sets (1, 2) of joint guidance given in 2023 by the FDIC, Federal Reserve and OCC. We’ll come back to that.
Why did CFTC withdraw its digital asset guidance?
However, the CFTC rescinded two documents, where at least one of them suggested sensible safeguards that appear quite valid. Perhaps we’re missing something and it was somehow abused.
The CFTC rescinded one document that required (among other things) reporting of trades of more than five Bitcoins, which is perhaps a low threshold. Hence, there’s some sense in rescinding that 2018 advisory because it “is no longer needed given additional staff experience with virtual currency derivative product listings and increasing market growth and maturity.”
However, a more recent 2023 guidance on derivatives clearing highlighted some of the cybersecurity risks with crypto, especially with derivatives that require the physical settlement of cryptocurrencies. Unquestionably, crypto carries greater cybersecurity risks than, say, the transfer of oil. Hence, surely that’s a valid point, and clearing houses should take extra care and have appropriate safeguards? Rescinding it to “ensure that it does not suggest that its regulatory treatment of digital asset derivatives will vary from its treatment of other products,” does not appear quite so logical.
The CFTC’s guidance is completely different from the SEC’s SAB 121 staff accounting bulletin, which suggested an entirely non standard accounting treatment and blocked banks from providing crypto custody without the appropriate Congressional oversight. When the SEC rescinded this bulletin, it did not say, “Have at it”. Instead, it suggested an alternative way to address risks.
If a regulator doesn’t feel it can highlight any risks with digital assets or blockchain, that surely is problematic and inhibits their ability to fulfill their duties. After all, cryptocurrencies do carry significant risks that should not be swept under the carpet. Many of the risks can be mitigated. Ignoring them discourages addressing them, which creates bigger risks for the entire financial system. An unbiased and balanced approach to regulation is critical.
