FDIC leader wireframes regulation, legislation, needed to move forward with crypto such as payment stablecoins

Before engaging in crypto-asset-related activities, banks must convince regulators that they have taken steps to ensure what they are doing is permissible, address risks, protect safety and soundness, and comply with all anti-money laundering laws, the acting head of the federal bank deposit insurance agency said Thursday.

Speaking in Washington, D.C., at the Brookings Institution’s Center on Regulation and Markets, Acting Federal Deposit Insurance Corp. (FDIC) Board Chairman Martin Gruenberg said there may be benefits associated with a crypto asset such as a payment stablecoin – as in fostering an inclusive, real–time payment system – but there are “important risks and policy concerns that will need to be taken into consideration before a payment stablecoin system is developed.”

“To the extent that a payment stablecoin system is developed, it should be designed in a manner that complements the Federal Reserve’s FedNow system and the potential future development of a U.S. central bank digital currency,” he said.

More specifically, regarding banks engaging in crypto-asset related activities such as stablecoins, Gruenberg said banks must ensure:

  • that the specific activity is permissible under applicable law and regulation;
  • that the activity can be engaged in a safe and sound manner;
  • appropriate measures and controls are in place to identify and manage the novel risks associated with those activities;
  • compliance with all relevant laws, including those related to anti-money laundering.

Gruenberg focused much of his remarks on a “payment stablecoin.” He contended that the extent to which such a vehicle would provide additive or complementary benefits to the FedNow system (expected to be launched next summer) remains to be seen. “Nonetheless, there may be merit in continuing to examine the potential benefits associated with payment stablecoins,” he said. “To be clear, I see the notion of payment stablecoins as conceptually distinct and separate from the existing broader universe of stablecoins and designed specifically as an instrument to satisfy the consumer and business need for safe, efficient, cost–effective, real–time payments,” he said.

He said payment stablecoins could be “significantly safer” than those now in the marketplace if they had three key features: they are subject to prudential regulation (such as being issued through a bank subsidiary); they are backed dollar-for-dollar by high-quality, short-dated U.S. Treasury assets; they were transacted on permissioned ledger systems with a robust governance and compliance mechanisms.

However, “important policy considerations” would have to be considered even if those features are included, he said.

“The development of a payment stablecoin could fundamentally alter the landscape of banking,” he said. “Economies of scale associated with payment stablecoins could lead to further consolidation in the banking system or disintermediation of traditional banks. And the network effects associated with payment stablecoins could alter the manner in which credit is extended within the banking system – for example by facilitating greater use of FinTech and non–bank lending – and possibly leading to forms of credit disintermediation that could harm the viability of many U.S. banks and potentially create a foundation for a new type of shadow banking.”

He also asked, rhetorically, if federal banking legislation is needed. “We must consider the extent to which legislation would be necessary to provide a cohesive framework to prudentially regulate a payment stablecoin system from ‘end–to–end’ and to ensure that consumers are appropriately protected in the process,” he said.

Remarks by FDIC Acting Chairman Martin J. Gruenberg at the Brookings Institution on The Prudential Regulation of Crypto-Assets