FDIC's Hill calls for more nuance in regulatory approach to digital assets

Bloomberg News

WASHINGTON — Federal Deposit Insurance Corp. Vice Chair Travis Hill Monday said federal bank regulators' slow pace in providing clarity to companies interested in utilizing blockchain and distributed ledger technology might be surrendering U.S. influence in an evolving sector of the financial industry. 

"While the largest banks are able to hire consultants and staff in Washington, D.C., to read the tea leaves to discern what might be approved, the message being heard by the vast majority of the industry could be interpreted as don't bother trying," Hill said. "Our goal should still be to provide as much clarity as is feasible regarding what is permissible and what we consider safe and sound [and] to the extent that we need to maintain a bank-by-bank approval process, it is critical that we provide feedback to institutions in a timely way."

In 2021, the agencies issued a set of guidelines aimed at providing clarity to the public on various legal and policy questions regarding digital assets. But since then, as Hill noted, the agencies have not issued formal rules on digital assets and have required institutions to individually engage with regulators before undertaking any activities related to digital assets. 

In addition, Hill also argued the agencies need to distinguish between cryptocurrency and the use by banks of blockchain and distributed ledger technologies. 

"I do not think banks interested in the latter, insofar as it simply represents a new way of recording ownership and transferring value, should need to go through the same gauntlet as banks interested in crypto," said Hill.

Hill also renewed his call for the FDIC to tackle the issue of how to classify a type of digitally recorded real-world asset known as tokenized deposits — or, fungible, digital notes that record deposit claims against a commercial bank similar to how deposit account balances function today.

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Hill argued the agency should take stakeholder and industry comment if it decides it needs to distinguish tokenized deposits from traditional deposits for regulatory or reporting purposes. 

"As financial institutions and developers around the world continue to develop blockchain and distributed ledger technologies, a poor regulatory approach to these issues presents substantial opportunity costs for bank customers and the U.S. economy, discourages institutions from investing in the future, and cedes influence to non-U.S. jurisdictions,"  said Hill. 

Hill also touched separately on the SEC's custody rule — which specifies that an entity that safeguards crypto assets should recognize such an asset on its balance sheet as both an asset and a liability. Hill said this treatment, which is different from how firms custody other types of assets — namely, off-balance sheet and considered customer property — is prohibitively onerous for banks and gives nonbank crypto exchanges an upper hand. He also thinks SEC's crypto definition is erroneously broad and could lump in tokenized real-world-assets into the accounting regime. 

Hill is not alone in questioning the rule. His Democratic colleague Michael Hsu, along with Fed Chair Jerome Powell, discussed in separate letters to House Financial Services member Rep. Andy Barr, R-Ky., their reservations that the rule could undermine custody banking by requiring major shifts in the custody practices at banks and bring higher costs.

"I think this is a clear example of why it is generally constructive for agencies to seek public comment before publishing major policy issuances," Hill said. "At a minimum, [I] believe it would be helpful to clarify that SAB 121 does not apply to the wider universe of tokenized assets beyond blockchain-native assets."