Acting OCC Comptroller Says Banking Regulation Would Mitigate Crypto Risk

OCC Acting Comptroller Michael J. Hsu discussed the future of crypto-assets and the potential benefits of banking regulation.

In an address to the British-American Business Transatlantic Finance Forum, Hsu identified some of the risks associated with stablecoins and suggested that regulating issuers as banks might actually enable more sustainable innovation. He acknowledged the importance of stablecoins as a bridge between the fiat and crypto worlds, including the central role of stablecoins in decentralized finance. He also noted, however, that stablecoins could be subject to run by investors if confidence in these assets fades, particularly those with “questionable and opaque reserve management procedures.” He compared such a potential run on stablecoins to the 2008 financial crisis, where the runs affected banks, securities firms, structured finance vehicles and money market funds.

Mr. Hsu proposed that banking regulation could mitigate flight risks for potential investors by making these assets appear to be as safe as ordinary bank deposits. He suggested that the presence of (i) reserve funds, (ii) oversight by banking supervisors, and (iii) access to a central bank‘s discount window for liquidity could inspire confidence in consumers. He argued that “strong and targeted federal regulation of currency and banking can help establish a strong foundation for the economy allowing for healthy innovation and growth.”

Mr. Hsu also described how crypto-assets are increasingly intertwined with the rest of the economy, requiring a coordinated regulatory response. For example, he highlighted the OCC’s cooperation with the Federal Reserve and FDIC in establishing a common set of defined terms, risks and roadmaps for crypto-asset regulation (see cover former). He noted, however, that large crypto intermediaries do not currently face a single, comprehensive regulator, and as they continue to grow, the risks associated with a lack of cross-agency collaboration will increase.

CFTC Commissioner Stump outlines regulatory challenges posed by innovation

CFTC Commissioner Dawn D. Stump outlined the regulatory challenges posed by innovation in the fintech market.

In an address to the Digital Chamber of Commerce, Commissioner Stump said the pace of market innovations in fintech areas, such as digital assets and decentralized finance, increasingly presented the CFTC with ” new questions” which require “global reflection” by regulators. She acknowledged that the CFTC’s current approach of relying on enforcement actions to address these issues was “insufficient” and that the current regulatory framework needed to evolve to meet market demands. She argued that the CFTC needs to “bridge the gap between its enforcement and oversight functions by setting more clearly defined regulatory expectations for new, innovative applications in the derivatives market infrastructure.”

Ms. Stump identified three areas where the CFTC needs to address the regulatory challenges posed by innovation:

• trading venues (designated contract markets and swap execution facilities) – how to achieve effective regulation so as to enable infrastructure providers and their customers to benefit from innovation;

• clearinghouses (derivatives clearing organizations) – how to adapt to new retail-focused derivatives clearing organizations that are moving away from a middleman model in a way that keeps consumers safe while encouraging growth; and

• Brokers and Counterparties (Commodity Futures Merchants) – how the CFTC Rules for a Futures Commission Merchant should apply to retail commodity transactions involving digital assets, such as Bitcoin.

FRB Governor Brainard prioritizes controlling inflation during nomination hearing

During a hearing before the Senate Banking Committee on her nomination as Vice Chairman of the Federal Reserve Board (“FRB”), Governor Lael Brainard argued that monetary policies must be “focused on reducing the inflation at 2% while maintaining a recovery”. “

Governor Brainard addressed rising inflation rates, saying lowering the rate is the most important task for the FRB going forward. Governor Brainard also highlighted the strong rebound in the economy in terms of growth and unemployment, noting that this is the strongest economic recovery in 50 years.

Governor Brainard referenced her past experience dealing with economic distress, including on (i) stabilizing financial markets during the pandemic, (ii) supporting a recovery from the global financial crisis, and (iii) protecting of the economy against the contagion effects of economic crises abroad. She reiterated her commitment to the FRB’s objectives of price stability, maximum employment and maintaining the integrity of the financial system.

Governor Brainard was nominated by President Joseph R. Biden to serve as Vice Chair of the FRB on January 4, 2022. She has served on the FRB since her nomination and confirmation in 2014 during the administration of President Barack Obama.

NFA Reminds Members of Exemption Deadline for CPOs and CTAs

The NFA reminded businesses that the CFTC requires any CPO requesting an exemption from registration to file a Notice of Exemption by March 1, 2022.

The NFA has stated that CPOs may request (i) an exclusion from CFTC Rules 4.13(a)(1), (a)(2), (a)(3) and (a)(5) (“Exemption from ‘registration as a commodity pool operator’), (ii) an exclusion from CPO registration under CFTC Rule 4.5 (“Exclusion for Certain Otherwise Regulated Persons from the Definition of the Term “Commodity Pool Operator” Commodities””), or (iii) an exemption from registration as a CTA under CFTC Rule 4.14(a)(8) (“Exemption from Registration as a Commodity Trading Advisor”) .

The NFA has also provided information on how CFTC registrants can check the registration status of their customers. Specifically, NFA members can determine whether an exempt CPO/CTA has confirmed their exemption in two ways: (i) using the NFA BASIC system, and/or (ii) accessing a spreadsheet in the Annual Member Questionnaire which lists all those who have exemptions registered with the NFA that must be confirmed on an annual basis. The NFA warns members to contact any of their customers who have not renewed their exemption requests and determine if it is appropriate to continue doing business with them.

MSRB Annual Report Highlights Modernization Efforts

In its 2021 annual report, the MSRB highlighted the organization’s ongoing modernization efforts in the face of the challenges posed by the global pandemic.

The MSRB noted progress on four strategic objectives:

• modernizing market transparency systems, including the Municipal Electronic Market Access (or “EMMA®”) website;

• improve data platforms by leveraging cloud computing and data analytics;

• modernize market regulation by removing outdated guidance and providing targeted regulatory relief in light of the COVID-19 pandemic; and

• maintaining public trust through a commitment to diversity, equity and inclusion.

The MSRB also said it plans to undertake a review of its finances and rate structure to ensure an equitable and sustainable balance of funding.

Primary sources

1. Speech by OCC, Michael Hsu: The Future of Crypto-Assets and Regulation

2. CFTC Public Statement: Remarks from Commissioner Dawn D. Stump – We Can Do Hard Things

3. FRB Governor Lael Brainard: Testimony from the nomination hearing

4. Senate Banking Committee: Nomination Hearing

5. Senate Banking Committee: Toomey’s opening statement at Brainard, Thompson nomination hearing

6. Notice NFA I-22-01

7. NFA BASIC System

8. NFA Annual Questionnaire

9. MSRB Annual Report 2021: Building the Foundations for the Future

10. MSRB News Release: MSRB Releases 2021 Annual Report and Audited Financial Statements