The second-highest-ranking official at the Federal Deposit Insurance Corp. is expressing concern that regulators will stifle innovation in the growing cryptocurrency sector.
“I recognize the value in being cautious regarding the extent to which the FDIC-insured banking system engages with the crypto economy,” said FDIC Vice Chair Travis Hill during a speech at George Mason University. “But there are significant downsides to the FDIC’s current approach, which has contributed to a general public perception that the FDIC is closed for business if institutions are interested in anything related to blockchain or distributed ledger technology.”
Hill’s comments starkly contrast the warning his agency and other bank regulators issued last year on blockchain and cryptocurrency.
Weeks after the collapse of the FTX cryptocurrency exchange and arrest of co-founder Sam Bankman-Fried, the agencies announced they would handle blockchain requests on a case-by-case approach because it allowed them to “build knowledge, expertise and understanding of the risks crypto-assets may pose” to banks and customers.
Hill accused regulators of hiding behind a veil of secrecy and inconsistency. He said that some banks waited weeks to hear back from the FDIC. Other banks complained that they had to answer so many questions from regulators that it took their “attention away from developing new technologies and systems.
“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,” he said. “I think our goal should still be to provide as much clarity as is feasible regarding what is permissible and what we consider safe and sound.”
Hill argued that stakeholders need to speak up to achieve that clarity. “I think right now there is a perception that the FDIC is going to be hostile to anything that involves blockchain … whether it’s through public statements or engagement with institutions, I think conveying that this is something that the agency is open to (will help).”
Fear may be part of the reason regulators appear hesitant to open up blockchain development, particularly after FTX’s collapse.
Agnes Gambill, an associate professor at Appalachian State University, said she understands some of the fear because “regulators fear getting blockchain policy wrong.” Meanwhile, she agreed that regulators are using bureaucracy as an excuse to slow walk blockchain decisions.
“There are a lot of unknowns with a rapidly evolving technology,” she said. “I think part of the reason (that regulators are cautious) may be due to national security concerns and broader economic impacts regarding the dominance of the U.S. dollar around the world.”
Part of this fear may be that the FDIC doesn’t distinguish between blockchain technology and cryptocurrency.
There’s a vast difference, Gambill said, because blockchain is a technology that “eliminates the middle man, which reduces costs and increases efficiencies. The peer-to-peer nature of blockchain transactions also increases trust between essential parties by eliminating the possibility of censorship, error, corruption or control by central actors who administer transaction processes.”
Hill lobbied for the FDIC to make this distinction. “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.”
