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1 1 (February 6, 2023)

handle is hein.crs/goveklv0001 and id is 1 raw text is: Con gressiona IRes informing Ih L vegsla I d)a 2rch Servh since 1914 0 February 6, 2023 Crypto and Banking: Policy Issues Some banks have expressed interest in offering services related to cryptocurrencies and other digital assets. Yet extreme and persistent price volatility-along with several high-profile scandals, scams, thefts, and failures-have generated debate on the risks crypto could pose for banks and their customers if not properly managed. Banks could gain exposure to crypto by providing some types of cryptocurrency services. Alternatively, cryptocurrency firms may seek bank charters, forming banking organizations with crypto operations. While regulators at the state and federal levels have already begun to allow certain crypto firms to obtain limited purpose banking charters (see CRS In Focus IF11997, Bank Custody, Trust Banks, and Cryptocurrency), this In Focus analyzes the extent to which banking regulators-the Federal Reserve (Fed), Office of the Comptroller of the Currency (OCC), and Federal Deposit Insurance Corporation (FDIC)-are considering the role traditional banks should have in crypto markets. To date, Congress has deferred to regulators to set crypto policy for banks but may consider future legislation due to policy differences or because regulators have not created an overarching framework, instead employing an ad hoc approach generally outside the administrative rulemaking process. Bank Regulation and Crypto Crypto poses many of the risks for which banks are closely regulated, including safety and soundness, consumer protection, and anti-money laundering. Because banks are protected by a federal safety net, safety and soundness risks to banks are ultimately borne by taxpayers. Regulators or Congress can choose whether to manage these risks by prohibiting activities that are not consistent with these requirements or by imposing regulatory requirements to mitigate them. Regulators or Congress could set regulatory requirements around crypto that make it attractive or unattractive for bank participation. When an activity is highly risky, regulators can allow it but set the regulatory cost unattractively high. Alternatively, sometimes regulators or Congress decide that the risk-benefit trade-off of an activity is not favorable and impose blanket bans on bank participation in certain activities or asset classes-an option for addressing crypto. A downside to a blanket ban is that different types of crypto-related activities pose different levels of risk. Instead of regulating crypto uniformly, Fed Vice Chair Barr has called for ensuring that crypto activity inside banks is well regulated, based on the principle of same risk, same activity, same regulation, regardless of the technology used for the activity. Risk is not the only reason a bank might not be allowed to engage in an activity under current law. A central tenet of bank regulation is that banks should engage only in activities that are part of or incidental to the business of banking. Some such activities are explicitly laid out in statute, while others have been interpreted to be related by the bank regulators. Bank regulators or Congress could choose to allow (or prohibit) some or all activities related to cryptocurrency on the basis that they are (or are not) closely related to the business of banking. Although bank regulators can manage the risks a bank takes, they cannot directly address risks in underlying crypto markets. Fed Vice Chair Brainard argued, It is important for banks to engage with beneficial innovation and upgrade capabilities in digital finance, but until there is a strong regulatory framework for crypto finance, bank involvement might further entrench a riskier and less compliant ecosystem. Further bank entry into crypto might increase risk. For example, banks can be a source of systemic risk to financial stability. High-risk crypto activities might pose minimal systemic risk outside the banking system (even if they pose other risks) but could pose systemic risk if bank involvement threatened the stability of the banking system. Until now, this In Focus has considered options to limit bank involvement in crypto in order to reduce risk to banks (and by extension the financial system). Another strategy is to bring aspects of crypto into the banking regulatory umbrella to reduce the risk of crypto and provide legitimacy to the industry. Some policymakers have proposed limiting certain crypto activities only to banks. For example, a 2021 report issued by the Treasury and regulators called for prudential regulation of payment stablecoins to address systemic risk (on the grounds that stablecoins are prone to destabilizing run risk). Specifically, the report called for legislation allowing only insured depositories to issue payment stablecoins. Today, stablecoins available to consumers are generally issued by nonbanks. Other proposals call for banks to issue payment stablecoins in competition with nonbank issuers. Under existing authority, bank regulators may be able to allow banks to issue payment stablecoins but could not prevent nonbanks from issuing them. (See CRS Legal Sidebar LSB10754, Stablecoins: Legal Issues and Regulatory Options (Part 2).) One strategy would be for regulators to take no significant action in the short run. This could discourage banks from taking risks that might result in disciplinary action while regulators evaluate and formalize potential rules. It is also possible that regulators could slow-walk regulation and guidance in an attempt to avoid clashes with industry while at the same time allowing banks to develop their own

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