All aboard: Top US regulators sound more bullish than ever about moving ahead with crypto initiatives

The heads of several powerful financial regulators in the U.S. signaled this week that they were getting on board the fast-moving digital currency train.

Paul Atkins, Chairman of the Securities and Exchange Commission, said his agency is working on a framework for allowing the offer of crypto assets tied to investment contracts. Speaking at the Federal Reserve Bank of Philadelphia Fintech Conference on Wednesday, Atkins also indicated that the SEC is formulating a “token taxonomy” that would define which cryptocurrencies would be considered securities.

At the same event, a member of the Federal Reserve Board of Governors reiterated his support for stablecoins, digital assets with value generally pegged to fiat currency. Fed Governor Christopher Waller, who initially expressed his support for the digital currency four years ago, told attendees at the Philadelphia event that recent passage of Congressional legislation supported his view that stablecoins had the potential to become a viable financial instrument.

“In less than five years, things went from a crazy idea to law,” Waller said. “It’s just technology. There’s nothing evil about it. The mantra is we are a new Fed. We have to use technology.”

Paving the way for mainstream adoption

The interest of regulators in providing new frameworks for enabling digital currency is being driven both by popular sentiment and technology. About one in seven U.S. adults owns cryptocurrency today, and the digital asset economy is emerging as a $4 trillion force.

The stablecoin market is rapidly maturing as companies look more closely at AI to drive transactional platforms using micropayments. Devices will have to transact with each other, and this will require regulated financial rails.

“Only stablecoins can do that in a peer-to-peer way,” said Christopher Giancarlo, co-founder and executive chairman of the Digital Dollar Project. “Dollar based stablecoins are going to be the dominant currency in the metaverse.”

One of the most active government agencies in driving cryptocurrency initiatives is the Commodity Futures Trading Commission or CFTC. The acting chair is Caroline Pham, who has been leading a “crypto sprint” to implement recommendations made earlier this year by a White House working group on digital assets.

In September, the CFTC launched an initiative for the use of tokenized collateral, including stablecoins, in derivatives markets. Recent reports have indicated that the agency has been working with regulated exchanges to begin listing spot crypto products.

Less punishment, more enablement

The CFTC is being positioned by Congressional legislators to take over regulatory authority for bitcoin and various tokens. Under Pham, the agency has been moving rapidly to develop policies that will open new opportunities for the crypto industry, which had previously been reluctant to press forward for fear of government sanctions.

“We’re essentially moving to tokenized market infrastructure,” said Pham. “I believe in having the rules first and enforcement later.”

Meanwhile, the Federal Deposit Insurance Corporation or FDIC is also moving quickly to issue new crypto guidelines. During an appearance at the Federal Reserve event on Thursday, FDIC Acting Chair Travis Hill indicated that his agency plans to release guidance on tokenized deposit insurance and an application process for stablecoin issuers by the end of December.

At the core of the FDIC’s actions is a recognition that moving deposits to a blockchain should be treated the same as similar actions in traditional finance. Hill also acknowledged that the banking sector itself was becoming more heavily involved.

“A deposit is a deposit,” Hill said. “Moving a deposit from a traditional-finance world to a blockchain or distributed-ledger world shouldn’t change the legal nature of it. A number of the largest banks are investing heavily in tokenized platforms. In terms of how this is going to play out over the long term, I think it’s too early to say.”

Reining in fintech aggregators

Despite promising signals emerging from the discussion by top regulators in Philadelphia this week, the fintech industry still faces a number of hurdles. The Federal Reserve’s Waller clarified that his previous suggestion for making the Fed’s payment rails available for companies in the crypto world would apply only to organizations with a bank charter.

In addition, large traditional financial institutions such as JPMorgan Chase & Co. are unhappy about the flood of data requests bombarding their systems from fintech firms. JPMorgan is reportedly receiving nearly 2 billion data requests per month, with only 13% representing customer transactions.

“There will be more negotiation between banks and the fintechs and the aggregators,” said Greg Baer, president and chief executive of the Bank Policy Institute. “I’m not sure there is a need for a regulatory framework.”

There is also concern about what happens when unusual errors occur that could cause massive disruption in the financial system. An example of that occurred in October when Paxos, the crypto partner for PayPal, minted $300 trillion worth of stablecoin in a technical mistake.

There were not enough dollars in global circulation to back a transaction of that size. Paxos quickly identified the internal technical error and reversed the action, but it served as a reminder that this is still fintech and glitches happen.

There may also be a technical solution to guard against this in the future, according to Sergey Nazarov, co-founder of Chainlink Inc. His firm produces Secure Mint, a verification check embedded directly into a token’s smart contract minting function to ensure proof of reserves.

“That incident was completely avoidable,” Nazarov said. “Programmability will give you new features as well as protection. The system protects us.”

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