Clarify stablecoin regulation, FDIC emphasizes key points for banks' Crypto business

Source: cryptoslate

Compiler: Blockchain Knight

The Federal Deposit Insurance Corporation (FDIC) is developing a more relaxed and transparent framework for U.S. banks to engage 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 Washington Summit, 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 years, U.S. banking regulators have maintained a more cautious approach.

The FDIC now believes that a complete ban on the use of public blockchains is too strict. However, Hill emphasized 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 intends to issue more guidance on specific use cases for digital assets.

Hill stated that the agency will continue to evaluate outstanding 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 robust standards.

Hill recently pointed out that the revised guidelines from the agency represent 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 entities to notify the agency before engaging in digital asset and blockchain activities.

Regulatory framework for stablecoins and deposit insurance

Hill also talked about 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 illicit finance, and cybersecurity standards.

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

The FDIC is currently considering whether to further clarify the boundaries of activities permitted 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, deposits are deposits.”

However, he expressed concerns about whether counterparties could use smart contracts to withdraw funds at par value after the bank’s collapse. Without safeguards to prevent such outflows, it could increase the cost of liquidation.

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

Hill pointed out that the challenge is to align on-chain programmability with traditional regulatory protections designed to ensure orderly liquidation of failing institutions.

These changes by the FDIC mark its official move towards providing regulatory clarity for banks exploring digital asset infrastructure, while emphasizing the need for prudent risk management and further clarification of permitted activities.