Introduction
In a press release on November 23, 2021, several US government agencies announced a crypto-asset policy sprint intended to bring banking regulations to the crypto ecosystem by the end of 2022. This sprint, which aims to establish rules that protect investors, banks, and the financial system, has been largely met with enthusiasm, but some experts warn that rushing to implement policies may stifle institutional-level cryptocurrency and crypto-services adoption.
Thus far, the move has attracted the attention of US financial services company Morgan Stanley, and at the time of the announcement, sent the stock prices of crypto banking companies Silvergate Capital and Signature skyrocketing.
US Regulators Fed, FDIC and OCC Target Crypto Banks
Three US regulators, the Federal Reserve, Federal Deposit Insurance Corp. (FDIC), and Office of the Comptroller of the Currency (OCC) are collaborating on the rapid development of regulations for crypto banks. A report from Morgan Stanley indicates that this so-called “Policy Sprint” has come sooner than expected, and may be good for the crypto ecosystem.
While Morgan Stanley expected a regulatory framework for crypto banking operations, they noted that the “sense of urgency” may result in clearer regulations, sooner rather than later. They also stated that expertly-crafted regulation will increase the adoption of cryptocurrency and its related services. This move was temporarily positive for crypto banks like Silvergate and Signature.
Indeed, both Silvergate Capital and Signature saw stock prices on November 24, the day after the announcement. Silvergate’s stock jumped by 6.9% and ended the day at 6.5%.
What did the U.S. Government Statement say?
The press release claims the move is designed to quickly help “supervised institutions” — banks, financial service providers, et al — engage in crypto-asset related business by clarifying and consolidating policies across different agencies. Indeed, it seeks to ensure different agencies are on the same page regarding regulations related to issues like money laundering and consumer protection.
It adds that the government is attempting a so-called “sprint” in order to deliver concise regulations as quickly as possible.
Sprint goals:
- Agreeing upon a commonly used crypto terms between agencies and banking institutions
- Identifying “key risks”— especially those related to legal considerations, compliance, and consumer protection
- Assessing current regulations regarding crypto-assets and their validity/applicability
The analysis surveyed activities supervised institutions may engage in:
- The custody, purchase, and sale of crypto
- The use of crypto in collateralizing loans
- Stablecoins and payment activities
- Holding of crypto assets on banking sheets
Analysis
Analysts ultimately concluded that almost all of the above issues required more clarity, paving the way for future regulation.
In general, the decision to rapidly implement rules for banks in the crypto ecosystem is being viewed positively. The idea is that the sooner regulations are in place the sooner banks and financial actors can provide predictable services. Likewise, as the implementation of regulation is inevitable the attitude generally leans towards a “the sooner the better” viewpoint.
On the other side of the coin, Morgan Stanley also warned about a rushed policy implementation, as moving too quickly may “inadvertently inhibit the adoption of cryptocurrencies and their related services. They also warned that the future is not set in stone and that regulators could still choose to adopt policies that stifle the growth of crypto and its related services. Indeed, while unlikely, they could even ban them altogether.
Likewise, the move signals increased scrutiny on the use of stablecoins like Tether, adding further potential challenges to the $USD-backed token’s ever growing list of problems.
Stablecoins continue to be an area of regulatory scrutiny and any Congressional work on cryptocurrency regulation would likely have to start with regulating the $127 billion industry of stablecoin issuers, according to a House Representative. Rep. Patrick McHenry (R-N.C.), the highest-ranking GOP member of the House Financial Services Committee, recently said that stablecoins are the “soft entry point here by which we can build consensus on a bipartisan way to create law”.
Conclusion
In the weeks following the PR release the value of stocks for both Silvergate and Signature Capital have corrected. This being said, a consolidation of terms and regulation related to crypto is on its way, and will clear the path for increased use of crypto by banks. While the future remains uncertain, this sprint, and its resulting policies is worth keeping an eye on.
