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US agencies unveil 'crypto sprint' roadmap as regulatory debate heats up

U.S. financial regulators on Tuesday released an inter-agency policy agenda for regulating cryptocurrencies, as discussions unfold about how to provide oversight for the booming market.

The so-called “crypto sprint,” as officials call it, sketches out a to-do list for 2022 that will offer crypto players more clarity on the rules of the road.

It summarizes plans by the Federal Reserve, Federal Deposit Insurance Corp (FDIC) and Office of the Comptroller of the Currency (OCC) for which activities by banks in crypto are legal, and how financial players should comply with existing regulations on safety and soundness and consumer protection when it comes to crypto.

“The interagency sprints quickly advanced and built on agencies’ combined knowledge, which helped identify and assess key issues related to potential crypto-asset activities conducted by banking organizations,” regulators said in a statement.

Regulators will focus on oversight of how banks could store crypto assets safely, handling exchanging customers’ fiat currency for cryptocurrencies, and offering purchases of cryptocurrencies. The roadmap also covers settling and executing trades, loans backed by crypto assets, issuing stablecoins, tax services and whether to hold crypto assets on the balance sheet.

The agencies also will assess applying bank capital and liquidity requirements for holding crypto assets, noting that they’ll continue to consult with the Basel Committee on Banking Supervision on capital requirements.

The Basel Committee, part of the Bank of International Settlements, sets global standards for banking regulations. They’ve proposed two groups of capital requirements, including that cryptocurrencies like bitcoin should be subject to a higher risk weighting of 1250%.

Yet large banks, including JPMorgan Chase and Deutsche Bank oppose this capital level, calling it too conservative and could stop banks from being involved in the crypto market.

The agencies stated they’ll continue to monitor developments in crypto-assets and may address other issues as the market evolves.

“Regulators are promising actions that could probably impact decentralized finance and crypto trading,” says Jaret Seiberg, analyst with Cowen & Co. “It is broadly supportive of our view that regulators plan to treat crypto solutions the same as the product it is trying to replicate.”

Officials are laying out their initiatives in the crypto space after the President’s Working Group on Financial Markets issued recommendations recently on how to regulate stablecoins, tasking regulators with using their current authorities to regulate the sector. That’s now being translated to all of crypto.

OCC weighs in

As the regulators sketched out a broad outline of their plan to offer clarity on which crypto activities are legal for banks, the OCC, which oversees national banks, is clarifying that national banks and federal savings associations can engage in cryptocurrency activities — if they get approval from regulators.

Few banks are engaging in crypto right now, but for those that aren’t, and want to do so going forward, will have to earn the agency's seal of approval.

The OCC says banks must demonstrate to regulators that they have proper risk management controls in place before they can deal in crypto. The agency said on Tuesday that institutions need to address risks of cryptocurrencies, including hacking, fraud, and theft, liquidity risk, anti-money laundering, sanctions requirements, and consumer protection laws for the agency to determine whether they can deal in crypto safely. After receiving approval, only then can the bank engage in crypto activities.

The OCC believes that providing cryptocurrency services is a modern form of traditional banking, and that banks are authorized to perform. Among permissible activities, the OCC has previously determined and is reiterating banks may hold deposits that serve as reserves for stablecoins that are backed on a 1:1 basis by a single fiat currency, and held in hosted wallets.

Banks are also allowed to use distributed ledgers and stablecoins to help facilitate payments—that includes buying, selling, and issuing stablecoins to enable payments.

“Providing this clarity will help ensure that these cryptocurrency, distributed ledger, and stablecoin activities will be conducted by national banks and federal savings associations in a safe and sound manner,” Acting Comptroller Michael Hsu said Tuesday. “This will provide assurance that crypto-asset activities taking place inside of the federal regulatory perimeter are being conducted responsibly.”

As industry players stake out positions and try and influence the debate, Binance founder and CEO Changpeng Zhao said the cryptocurrency exchange wants to help regulators better understand the space, and offer proper protection to investors.

“It’s always a subjective judgement,” Zhao told Yahoo Finance. “I think crypto definitely, compared to stock markets, is still much more nascent. I think the industry has grown to a point where there are many smaller players who are less protective of their users and we would like to see more regulations in the space so the retail consumers are protected.”

Meanwhile, the vacancy for the vice chair of supervision on the Fed's Board of Governors could hold implications for crypto regulations. Senator Elizabeth Warren said the role “must be filled by a strong regulator with a proven track record of tough and effective enforcement - and it needs to be done quickly.”

While regulators are putting their ideas out in a crypto sprint, President Joe Biden's pick for that position will get to influence the final outcome.

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