The Federal Deposit Insurance Corporation (FDIC) is establishing a more flexible and transparent framework for U.S. banks that wish to engage with cryptocurrency, including access to public, permissionless blockchains.
In remarks made at the American Bankers Association Washington Summit on April 8, Acting Chairman Travis Hill discussed the agency’s changing position on crypto-related activities.
Guidelines for engagement with public blockchains
A significant area of focus is the relationship between regulated banks and public, permissionless blockchains.
Hill pointed out that while many regions outside the U.S. have allowed banks to operate with public blockchains for years, U.S. banking regulators have taken a much more cautious approach.
The FDIC now views an outright ban on using public blockchains as overly restrictive. However, Hill emphasized the necessity for appropriate regulations to oversee such activities.
The agency is currently reviewing existing interagency guidance and prior joint statements from January and February 2023 in order to establish sustainable standards for the responsible utilization of public networks.
The possibility of public blockchains functioning in a permissioned manner is also being examined. According to Hill, regulators need to determine how to define and regulate blockchain configurations that exist between open and permissioned settings.
Further guidance anticipated
The FDIC has indicated it plans to provide more specific guidance concerning various digital asset use cases.
Hill mentioned that the agency is still evaluating unresolved issues related to the extent of acceptable crypto-related activities, the regulatory view of blockchain-based products, and the risk management expectations for banks operating in this domain.
The overarching goal is to create a consistent and transparent supervisory framework that fosters innovation while maintaining compliance with safety and soundness standards.
He recently remarked that the agency’s updated guidance signifies a fundamental shift in how crypto and blockchain technologies will be regarded within the U.S. banking framework.
He also highlighted that the FDIC has lifted its former requirement for supervised institutions to inform the agency prior to engaging in digital asset and blockchain activities.
Stablecoin regulations and deposit insurance frameworks
Hill addressed emerging inquiries regarding stablecoins, particularly in light of legislative actions proposed by Congress.
The FDIC is considering updates to deposit insurance regulations to clarify eligibility criteria for stablecoin reserve deposits. Key areas of focus include liquidity risk management, protections against illicit financing, and cybersecurity standards.
In 2020 and 2021, the Office of the Comptroller of the Currency (OCC) deemed several crypto-related services to be permissible for national banks, such as stablecoin custody and issuance, serving as blockchain validator nodes, and accepting stablecoin deposits.
The FDIC is now deliberating whether to further specify the allowable activities in this area or broaden regulatory guidance to encompass additional use cases.
Tokenized deposits and smart contract risks
The speech underscored the importance of clearer regulatory treatment for tokenized real-world assets and liabilities, which includes tokenized commercial bank deposits. Hill stated that the FDIC maintains the view that “deposits are deposits, regardless of the technology or recordkeeping methodology used.”
However, he expressed concerns about the ability of counterparties to withdraw funds at par using smart contracts in the event of a bank failure, which could raise resolution costs if safeguards aren’t implemented to prevent such outflows.
This concern is propelling internal FDIC initiatives to explore technical solutions that may prevent unintended fund leakage during bank resolution situations.
Hill indicated that the challenge lies in reconciling on-chain programmability with traditional regulatory protections that ensure the orderly dissolution of failed institutions.
The amendments introduced by the FDIC signify a formal effort towards achieving regulatory clarity for banks venturing into the digital asset space while highlighting the necessity for responsible risk management and further refinement of definitions surrounding acceptable activities.