Regulators Defend Cautiousness on Crypto at Senate Panel Hearing

Tuesday’s appearance by three regulators before the Senate Banking Committee may have been scheduled before last week’s collapse of crypto exchange FTX, but digital asset risk was the undisputed hot topic of the hearing.

Comments from lawmakers highlighted viewpoints from across the political spectrum. Senator Sherrod Brown, D-OH, chair of the panel, thanked the officials – Michael Barr, Michael Hsu and Martin Gruenberg – “for your skepticism of cryptocurrencies.”

If regulators had given more credibility to the crypto space, “we would cut another check,” another Democrat, Senator Jon Tester of Montana, claimed, according to CoinDesk, in a reference to government bailouts of financial firms following of the 2007-08 recession.

Sen. Pat Toomey, R-PA, outgoing ranking member of the panel, argued that regulators hold “part of the obligation” to provide clear guidance on how banks should manage digital assets – and that their reluctance to do so “has helped push crypto business into foreign jurisdictions with weaker or non-existent regulatory regimes.

The Office of the Comptroller of the Currency (OCC) about a year ago confirmed that national banks and federal savings associations can engage in certain crypto and stablecoin activities, provided that they demonstrate that they have adequate controls in place.

Hsu, the acting head of the OCC, reiterated on Tuesday. “If banks can demonstrate that they can conduct this business in a safe, sound and fair way, we are all ears,” he told lawmakers, according to American Banker.

Hsu said last month that his agency needed more information about banks’ crypto-related activities to understand the extent of exposure to cryptoassets.

Barr, the Federal Reserve’s Vice Chairman for Oversight, asserted that few banking institutions seek to engage in crypto custodial business.

“We’ve seen banks operate quite cautiously so far,” he said, according to Reuters.

Toomey, however, argued that crypto customers could be better protected if regulators allowed commercial banks to engage in more crypto activities, such as protecting digital assets alongside traditional investments. He chastised regulators for not giving more guidance on that front — like the OCC, the Fed and the Federal Deposit Insurance Corp. (FDIC) pledged a year ago to do so through 2022.

Toomey also cited a potential financial impediment to crypto custody for banks: namely, that the Securities and Exchange Commission (SEC) requires the crypto holding companies it oversees to label such holdings as liabilities on their balance sheets and hold assets to offset this risk. .

“Wouldn’t that impose a significant cost on the banks? Toomey asked Barr.

Regulators “don’t want to stifle innovation,” Barr said. “But when regulation is lax or behind, it can facilitate risk-taking and a race to the bottom that endangers consumers, businesses and the economy and discredits new products and services with consumers and investors. .”

Barr said the Fed, FDIC, and OCC are working together “to assess the risks and opportunities posed by a range of cryptoasset-related activities,” according to The Wall Street Journal.

“We are concerned about risks that we don’t know about in the non-banking sector,” Barr said, according to American Banker. “That obviously includes crypto activity, but more broadly the risks in parts of the financial system where we don’t have good visibility, we don’t have good transparency, we don’t have good data. create risks that accrue to the financial system we regulate.

Citing a bill she introduced in June that would split crypto oversight between the SEC and the Commodity Futures Trading Commission (CFTC), Sen. Cynthia Lummis, R-WY, said “it’s clear that Congress must regulate digital assets”.

Sen. Bill Hagerty, R-TN, blamed Congress, in part, for failing to pass legislation establishing crypto guidelines.

However, he added, according to CoinDesk, that “no amount of ill-considered, knee-jerk overregulation here in the United States would have stopped a foreign-domiciled company like FTX from doing what it did.”

Barr, however, defended the role of regulators, saying they are “the first place to start in this space.”

“They have existing authorities. We want to make sure they are fully utilized,” he said, according to Reuters. “Some of the activities that were taking place in this space claimed to continue in a way that was designed to evade surveillance. I think we have seen the enormous human costs of this type of activity.

The ongoing crypto meltdown wasn’t the only topic discussed in Tuesday’s hearing.

Barr, in written remarks, said the Fed would place more emphasis on liquidity, credit and interest rate risk in the companies it oversees.

“Uncertainty has led to increased volatility in financial markets and may also reveal pockets of excessive leverage and liquidity risk in the non-banking financial sector, which is likely to ripple through the banking system and the real economy. “, did he declare.

He also predicted a “significant downturn in the economy”, according to Reuters.

“There is no recession right now,” Barr said. “We are in a period of slowing economic growth.

Continuing on crypto, Sen. John Kennedy, R-LA, — known for throwing zingers such as “I don’t know if I should call you ‘professor’ or ‘comrade,'” aimed at a former candidate of Soviet descent to run the OCC last year asked regulators on Tuesday if any of them would hire former FTX CEO Sam Bankman-Fried “to run a food truck.”

“Do you know who was watching those little giggles? he asked, according to CoinDesk.

“This is currently under investigation, senator,” said Gruenberg, acting chief of the FDIC.

Barr, Hsu and Gruenberg are scheduled to testify before the House Financial Services Committee on Wednesday.