Digital Assets and Cryptocurrency

Position

• ICBA has serious concerns regarding threats posed by cryptocurrency to privacy and to consumers, and financial stability resulting from increases in money laundering, terrorist financing, and fraudulent activity.

• Unregulated cryptocurrency threatens to disintermediate community banks and undermine their ability to provide funding to support local economic activity, growth, and development.

• Cryptocurrencies have a history replete with volatile price swings, hacks, and exploits. ICBA cautions policymakers that strategic reserves of cryptocurrencies may lose value and lead to unknown risks for the US economy.

• ICBA urges policymakers to ensure public trust by fostering collaboration between domestic and international regulatory authorities to mitigate risks as the adoption of cryptocurrency continues to increase.

• ICBA supports ongoing efforts by policymakers to harmonize regulations to ensure strong, clear, and consistent oversight of cryptocurrency service providers and establish guidelines for any permissible activities by banks.

• ICBA believes most cryptoassets are likely offered and sold as unregistered securities. Therefore, crypto entities should be subject to relevant securities laws and regulations. ICBA supports the efforts of the U.S Securities and Exchange Commission to apply the securities framework to cryptoassets and related entities.

• ICBA urges policymakers, regulators, law enforcement, and national security organizations to coordinate their efforts to combat ransomware and prevent bad actors from using cryptocurrencies for illicit activities and investment scams.

• ICBA encourages regulators to collaborate on a comprehensive approach to prevent the rise of decentralized finance (DeFi), a shadow banking system filled with unregulated, decentralized platforms that pose risks to consumers, the financial system, and U.S. national security.

• Stablecoin issuers should not have access to Federal Reserve master accounts or the payments system.

• Special purpose bank charters or similar alternatives should not be granted to crypto entities that do not fully meet the requirements of federally insured and supervised chartered banks.

• Regulatory frameworks must establish strong federal oversight for stablecoin issuers to prevent a regulatory race to the bottom.

• Any regulatory or supervisory regime applicable to nonbank issued stablecoins should be comparable to a functionally similar product offered by a bank or other traditional financial services provider. This will ensure risks created by loosely regulated nonbank firms do not spill over into the traditional banking system.

• The separation of banking and commerce must be preserved by ensuring commercial firms are not given the significant power of issuing private currency.

• ICBA is concerned about the potential development of state-issued stablecoins that could negatively impact deposits at community banks, thereby harming their ability to provide credit to their communities. If states create new forms of money or payment systems, the U.S. financial system could experience significant fragmentation, threatening financial stability.

• ICBA urges policymakers to engage with community banks as the Federal Reserve begins to explore new tokenization systems.

Background

The cryptocurrency industry has demonstrated continued growth despite large-scale malfeasance and lawsuits against significant players. Community bankers remain concerned about the risks presented by digital assets, including rampant investment scams and a lack of strong consumer protections and regulatory oversight. In particular, bankers are becoming increasingly concerned about the growing potential of digital assets to jeopardize the financial stability of the traditional banking sector.

Bankers remain unconvinced that stablecoins are the “silver bullet” for cross-border payments. In fact, the global financial system may be disrupted if stablecoins become widely adopted for payments. ICBA urges policymakers to develop a consistent regulatory framework for stablecoins that addresses the risks they pose to the wider financial system, establishes strong federal oversight to prevent charter arbitrage, preserves the separation of banking and commerce, and ensures that issuers do not have access to Federal Reserve master accounts. Addressing these complex issues will require collaboration with international partners to resolve critical regulatory, legal, technical and governance questions.

DeFi, a growing ecosystem of financial applications that run on public blockchains, also threatens to disintermediate community banks and create a shadow banking system filled with unregulated platforms that pose risks to consumers, the financial system, and U.S. national security. Any regulatory regime applied to cryptocurrency should be comparable to the multitude of regulations applicable to functionally similar products and services offered by the traditional financial system.

Cryptocurrencies also have a long history of being used for illicit activities. North Korea continues to steal and launder billions of dollars’ worth of cryptocurrency to circumvent U.S. sanctions and advance its weapons of mass destruction program. The broader use of cryptocurrency, without accompanying regulation or oversight, allows financial crimes and threats to national security to proliferate. Therefore, protecting national security and implementing anti-crime measures should be primary drivers of cryptocurrency policymaking and regulation. ICBA strongly supports regulatory efforts to curtail the use of cryptocurrency mixers and anonymity-enhanced cryptocurrencies.