Why Warren and Sanders oppose cryptographic rules

The US $ 15 trillion national banking system is overseen by more than 2,000 examiners. Many work full-time in bank offices to ensure that risks to the financial system are identified in a timely manner. The system is not perfect. It failed to prevent the 2008 financial crisis and other major problems over the years. During our oversight of the Office of the Comptroller of the Currency, we imposed nearly $ 1 billion in fines on various banks for risk management violations. But the US requires banks to be subject to the strictest supervision of any industry because they make the system more secure.

This is why we were so surprised to read the recent letter from the Senses. Elizabeth Warren, Bernie Sanders, Dick Durbin, and Sheldon Whitehouse urge our former agency to keep cryptocurrency businesses out of controlled banking. Cryptocurrencies are a large and growing industry that will increasingly compete with traditional banks as a means of payment, savings and loans. The cryptocurrency market, with a market cap of between $ 1 trillion and $ 3 trillion over the past year, is not insignificant compared to the banking sector. It presents tremendous opportunities to improve the legacy financial system, but it also presents growing risks that need to be handled urgently.

These risks have arisen in recent months. A so-called stablecoin project called TerraUSD exploded, resulting in billions in losses, when the liquidity of its sister token, Luna, dropped to zero. Compliance with the OCC requirements, the rules governing the guarantee relationships between Earth and the Moon, position limits and other risk management rules would have mitigated the disaster.


A cryptocurrency lender called Celsius then went bankrupt when the bets it made to generate the revenue needed to pay its customers’ interest went off the rails. If these counterparty risks had occurred within the regulated banking system, Celsius would have had to hold capital against them and conduct rigorous third party risk management. And cryptocurrency exchange Coinbase revealed in a recent quarterly report that customer assets could be at risk in the unlikely event of bankruptcy – a risk that wouldn’t exist if those assets were in the custody of a national bank.

In short, the crypto risk would be lower if more business were conducted within the supervised national banking system. This does not mean that cryptocurrencies stop being risky. Again, traditional banking is risky even within the highly regulated system overseen by the OCC. Who can forget JPMorganthis is

London Whale’s $ 6 billion loss, or the hundreds of millions of fraudulent loan losses of Citibank in its Banamex unit, or the spectacular bankruptcy of Washington Mutual, a $ 300 billion regulated savings?

But these very real risks have not prompted calls to push traditional lending out of the banking system. On the contrary, the sens. Warren, Sanders and others have called for tighter controls on non-bank lenders to push more lending activity into the banking system.

Why are these senators comfortable with expanding risky lending within the banking system as they struggle to keep crypto risk out? If they believed that banking supervision reduces the risks presented by financial intermediation, they would presumably treat cryptocurrencies in the same way as other risky financial assets. Their drive to keep cryptocurrencies out of the regulated sphere means that something else is happening.

Here’s our theory: Cryptocurrency developers are trying to build a financial system where users have more control. In this system, credit is assigned by algorithms rather than by lending agents, payments are settled instantly on blockchain rather than slowly within the Federal Reserve, and client funds are protected by cryptographic keys rather than hackable debit card PINs. A user-controlled financial system threatens the vision of a government-controlled system that Sens. Warren and Sanders continue to plead.

A government-sponsored version of their financial system would allow the United States Postal Service to offer banking services to the public. An even more extreme version requires Americans to keep their deposits directly with the Federal Reserve. This would allow the government to reduce bank balances to control the money supply, decide which payments to approve and disapprove of, and otherwise directly intervene in private financial decisions.

Establishing a government-controlled financial system would require federal legislation, and there is no indication that congressional leaders on either side want it. That’s why Senso. Warren and Sanders use their pens and phones to try to influence the OCC to slow the growth of a user-controlled, cryptocurrency-based financial system. The problem is that the OCC under the Biden administration has reaffirmed what we had concluded under our watch: Existing law allows banks to act as custodians of cryptocurrencies, support dollar-backed stablecoins, and participate in blockchains to send and receive payments. .

We agree with the administration’s warning that these cryptographic powers should only be exercised by banks that can demonstrate adequate risk management. But we also think it is retrograde to say that only risk-free activities should be allowed within the banking system. On the contrary: the purpose of banking supervision is to take on risky financial assets for which there is a high demand from customers and make them less risky.

Mr. Brooks is the CEO of Bitfury Group. He served as Acting Comptroller of the US currency, 2020-21, and Chief Legal Officer of Coinbase, 2018-20. Mr. Calomiris is a professor of financial institutions at Columbia Business School. He served as Chief Economist of the Office of the Comptroller of the Currency, 2020-21.

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