Clarifying stablecoin regulation: FDIC emphasizes key points for banks' crypto operations.

Source: Blockchain Knight

The Federal Deposit Insurance Corporation (FDIC) is developing a more flexible and transparent framework for U.S. banks participating in crypto asset activities, including the use of public, permissionless Blockchains.

On April 8, FDIC Acting Chairman Travis Hill spoke at the American Bankers Association conference in Washington, outlining the agency’s evolving stance on crypto-related activities.

Guidelines for Interacting with Public Blockchains

One of the key areas under review involves the interaction between regulated banks and public, permissionless Blockchains.

Hill acknowledged that while jurisdictions outside the United States have allowed banks to use public blockchains for many years, U.S. banking regulators have remained more cautious.

The FDIC now believes that a complete ban on the use of public Blockchain is too strict. However, Hill emphasizes the need for appropriate safeguards to regulate such activities.

The agency is evaluating the existing inter-agency guidance, including the joint statements issued in January and February 2023, in order to establish enduring standards for the responsible use of public networks.

The question of whether public chains can operate in a permissioned mode is also being considered. Hill stated that regulators must assess how to define and regulate blockchain configurations that blur the lines between open and permissioned environments.

The FDIC will issue further guidance.

The FDIC stated that it plans to issue more guidance on specific use cases of digital assets.

Hill stated that the agency will continue to assess pending issues related to the scope of crypto-related activities, regulatory treatment of blockchain-based products, and expected risk management for banks operating in this field.

The broader goal is to establish a consistent and transparent regulatory framework that promotes innovation while ensuring compliance with safe and sound standards.

Hill recently pointed out that the agency’s revised guidance represents a fundamental shift in how the U.S. banking system treats Crypto assets and Blockchain technology.

He emphasized that the FDIC has revoked its previous requirement for regulated institutions to notify the agency before engaging in digital asset and Blockchain activities.

Stablecoin Regulation and Deposit Insurance Framework

Hill also discussed the emerging issues surrounding stablecoins, particularly the legislative trends proposed by Congress.

The FDIC is reviewing potential updates to deposit insurance regulations to clarify the eligibility requirements for stablecoin reserve deposits. Key issues being evaluated include liquidity risk management, safeguards against illegal finance, and cybersecurity standards.

In 2020 and 2021, the Office of the Comptroller of the Currency (OCC) determined that national banks could offer several crypto-related services, such as stablecoin custody and issuance, participation as blockchain validation nodes, and accepting deposits related to stablecoins.

The FDIC is now considering whether to further clarify the boundaries of activities allowed in this area or to expand regulatory guidance to cover more use cases.

Tokenized Deposits and Smart Contract Risks

The speech also emphasized the need for clearer regulatory treatment of tokenized real-world assets and liabilities (including tokenized commercial bank deposits). Hill stated that the FDIC believes “regardless of the technology or record-keeping method used, a deposit is a deposit.”

However, he expressed concerns about whether counterparties could use smart contracts to withdraw funds at face value after a bank failure, as this could increase liquidation costs if there are no safeguards to prevent such outflows.

This concern is driving internal efforts at the FDIC to evaluate technical solutions to prevent unexpected outflows of funds in bank resolution scenarios.

Hill pointed out that the challenge is to align on-chain programmability with traditional regulatory safeguards aimed at ensuring the orderly liquidation of failing institutions.

These changes by the FDIC mark its formal step towards providing regulatory clarity for banks exploring digital asset infrastructure, while emphasizing the need for prudent risk controls and further clarifying the activities that are permitted.