From Terra LUNA to FTX, this year has produced no shortage of implosions in the cryptocurrency space, with the recent bankruptcy of crypto lender BlockFi coming as just the latest on a long list of big players wiped out. The cryptocurrency industry has seen its security and transparency flaws exposed by the series of collapses, and may be facing an existential challenge.
“We’ve observed, through numerous comment letters over the past year, significant concerns about the crypto ecosystem, and in particular these entities that present themselves as essentially shadow banks, presenting themselves as offering the same safety and security that they would find at their community bank. But in fact, that’s not the case at all,” Brian Laverdure, vice president for payments and technology policy at the Independent Community Bankers of America (ICBA), told Forkast in a video interview.
“So, I think in the wake of that, you’ll see some consumers maybe question interacting with that ecosystem, and hopefully instead turning to community banks again as their trusted providers of financial services,” he said.
Apart from security issues, cryptocurrencies may have lost some of their edge against legacy banks due to recent developments in traditional banking.
“You often hear about crypto proponents talking about crypto providing a faster payment mechanism, but those already exist in the regulated banking system … I think for many community banks that are seeking to offer some sort of faster payment solution, they’re prioritizing implementation for FedNow,” Laverdure said. “And crypto, compared to the products that are out in the marketplace today, again, it just goes back to that fundamental question of: ‘Can it provide something to their consumers that’s not already met by something in the marketplace and within the regulated banking system?'”
Amid the crypto collapses and the lengthy Crypto Winter, the ICBA still sees community banks interested in crypto assets, but one element is missing that’s keeping them out of the crypto space: regulatory clarity.
“(Banks) have to abide by what the regulators say. And we’ve received guidance from the Office of the Comptroller of the Currency (OCC), the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve. They’ve all issued bulletins about crypto asset activity, and they all say that banks that are thinking about this have to notify their supervisors, so it’s not really a question of, ‘Can they technically connect to these systems?’ It’s really, at the end of the day, what the regulations allow for,” Laverdure said.
Watch Laverdure’s full interview with Forkast Editor-in-Chief Angie Lau to learn more about developments in crypto asset regulation and how they might help the industry rebound.
Highlights
- FTX in context: “This is just the latest in a long string of incidents that highlight the volatility and really just the fundamental deficiencies within the crypto markets and the crypto ecosystem … FTX was not the only incident in the crypto markets this year. There’s also the collapse of Terra LUNA. There’s also multiple DeFi (decentralized finance) hacks — Ronin Network, Wormhole, Wintermute, Beanstalk … And so I think that’s important to keep in mind as we start to think about what sort of regulation needs to be in place that this is much bigger than simply one company.”
- Wavering faith in crypto lenders: “We’ve observed, through numerous comment letters over the past year, significant concerns about the crypto ecosystem, and in particular these entities that present themselves as essentially shadow banks, presenting themselves as offering the same safety and security that they would find at their community bank. But in fact, that’s not the case at all. So, I think in the wake of that, you’ll see some consumers maybe question interacting with that ecosystem, and hopefully instead turning to community banks again as their trusted providers of financial services.”
- The missing link in crypto adoption: “There are a handful of community banks that are participating in crypto asset activities now, but if more are going to do so, you must have clear regulatory guidelines in place before … They have to abide by what the regulators say … So it’s not really a question of, ‘Can they technically connect to these systems?’ It’s really, at the end of the day, what the regulations allow for. And then, does that solution actually meet any existing or future consumer need?”
- Regulatory action: “I think we’ll see regulators and policymakers take a much closer look at the risk presented by crypto assets, particularly with respect to the financial system. We know that there are going to be more efforts to understand the risk presented by crypto assets. The Treasury Department should have a report next February on DeFi. I think there’s also going to be another one on NFTs (non-fungible tokens). And I know that the FSB, the Financial Stability Board, recently said that they were going to make crypto assets a priority going into 2023. So, I think it’s just going to be much more of a laser focus on the risks and how they can be prevented or mitigated.”
- Stablecoin concerns: “For the time being, there’s still a real lack of clarity about what exactly is permissible, including any activity related to stablecoin issuance or even holding reserves … There’s concerns among some regulators about what the impact of payment stablecoins could have if they continue to be offered by non-bank providers. The acting chair of the FDIC spoke about this just a few weeks ago, talking about the potential for payments stablecoins to be highly disruptive to the community banking model in particular.”
Transcript
Angie Lau: The collapse of FTX — the third-largest cryptocurrency exchange — in November has taken the industry by storm. Thousands of retail investors were left unable to withdraw their funds from the bankrupt exchange. But the contagion did not stop there.
Crypto lender BlockFi was forced to file for bankruptcy. Many more have followed or are on the precipice. And as other companies are battling with the contagion, regulators are undoubtedly taking note. Will this lead to more hawkish regulatory decisions? Perhaps even more importantly, could clear digital asset regulations have prevented FTX’s meltdown? And what type of regulatory framework can protect investors in the future? Well, today we talk to somebody with perspective from the American community banking industry.
Welcome to Word on the Block, the series that takes a deeper dive into blockchain and all the emerging technologies that shape our world at the intersection of business, politics and economy. It’s what we cover right here on Forkast. I’m Forkast Editor-in-Chief Angie Lau.
Well, today we’re in conversation with Brian Laverdure. He’s the vice president for payments and technology policy at ICBA, the Independent Community Bankers of America. Brian, I appreciate you joining us. It’s a very timely conversation.
Brian Laverdure: Well, Angie, thank you for the invitation. I appreciate the opportunity to speak with you.
Lau: Absolutely. You’ve been part of the industry and, in fact, represent the traditional banking industry. I wonder about your immediate reaction when you heard the news of FTX and what happened afterwards.
Laverdure: I think, like many, we’ve been following the news closely, but the immediate reaction was: ‘This is just the latest in a long string of incidents that highlight the volatility and really just the fundamental deficiencies within the crypto markets and the crypto ecosystem.’ And compared to the safety and security that a consumer can find with the community banking system, it just highlights the issues.
Lau: When you say issues, specifically, what do you mean by that?
Laverdure: Well, I mean the issues in terms of, again, the safety and security with a community bank. A consumer knows that they can deposit their assets, that those assets will be protected and that their community bank will provide the payments, products and solutions that they need.
But unfortunately, for so many consumers who deposited their assets with various crypto providers, they come to find that they’re unable to withdraw them. And now many of them are working their way through a bankruptcy process. And it’s uncertain whether consumers will ever be able to access their assets again.
Lau: And that really is one of the biggest things. I think the moment was really kind of a face to what all of the issues are. And it really was coming to a head. Do you think that it really confirmed for you — coming from the traditional banking industry — what you observed, perhaps, and what the public perception might be right now?
Laverdure: Well, we’ve observed, through numerous comment letters over the past year, significant concerns about the crypto ecosystem, and in particular these entities that present themselves as essentially shadow banks, presenting themselves as offering the same safety and security that they would find at their community bank. But in fact, that’s not the case at all. So, I think in the wake of that, you’ll see some consumers maybe question interacting with that ecosystem, and hopefully instead turning to community banks again as their trusted providers of financial services.
Lau: I think those are two very different things, though. With the community bank, there is obviously participating in the kind of traditional finance way of getting yield, certificates of deposit, treasury notes and really traditional things. What crypto does and offers are two very different things. Do you think that these are ‘either or,’ or can both exist, in your view?
Laverdure: In terms of our perspective on this, the crypto ecosystem, it’s different. And to maintain the stability and the security of the financial system, it’s really important for regulators to come up with a very clear regulatory framework that provides very clear guidelines about which crypto asset activities are permissible and which ones are not permissible. I think that’s going to be really key going forward.
Lau: Did you see any early signs of, possibly, the FTX debacle, the implosion that we subsequently saw of FTX and Alameda Research’s signs of trouble? Did you see any of that before it happened?
Laverdure: No, I did not.
Lau: A lot of people have started to refer to FTX’s crash as crypto’s Lehman Brothers moment, as the company’s bankruptcy court filings revealed that FTX owed about US$3.1 billion to 50 of its largest creditors. And we now know, to your point, there are so many people around the world now having to line up and wait for this to really resolve itself in bankruptcy court. But, to your point, what measures could the industry have taken to prevent this type of event?
Laverdure: Well, I think in some respects it’s a bit premature, because we’re still learning more about the FTX case every day. And I’m sure that there will be quite a long time before we know the full story. And I think it’s more important to zoom out and remember that there’s more going on. FTX was not the only incident in the crypto markets this year. There’s also the collapse of Terra LUNA. There’s also multiple DeFi hacks — Ronin Network, Wormhole, Wintermute, Beanstalk. I mean, there’s been so many different incidents. And so I think that’s important to keep in mind as we start to think about what sort of regulation needs to be in place that this is much bigger than simply one company. And that’s something that we’ve repeatedly tried to raise, again, in our comment letters throughout the year.
Lau: And specifically, what are you calling for? What do you think needs to happen in terms of bringing some clarity and clear guardrails to the industry?
Laverdure: Well, we supported the President’s Working Group’s determination that only banks should be able to issue stablecoins. But we have also been long supporters of ongoing communication between the banking regulators, the OCC, the Federal Reserve and the FDIC. Here, domestically with the market regulators, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). And we recognize that there are roles for each of them to play. And so, going forward, it’s really important for all of them to maintain a good dialog to be able to blaze that regulatory path.
Lau: What do you think is missing as part of this dialog? For yourself and other policy observers and influencers and stakeholders, what do you think are the missing pieces still?
Laverdure: I think the missing pieces are, again, just that clear regulatory framework. And that’s something that we’ve asked regulators to provide. There are a handful of community banks that are participating in crypto asset activities now, but if more are going to do so, you must have clear regulatory guidelines in place before, so I think that that’s really just the missing element.
Lau: Is the appetite still there after FTX?
Laverdure: It’s really a very highly individualized decision. There’s no one-size-fits-all approach to crypto assets. For some community banks, they see crypto assets as solving some need for their consumer base, but others do not, so at this point, it’s a very highly individualized approach.
Lau: Well, I want to understand that a little bit better for our audience. Clear guardrails have been missing, at least on the U.S. front. You mentioned that a number of your community banks are already starting to participate in crypto. I wonder what they’re doing exactly, and what’s preventing them from getting deeper into the market and potentially for others to participate
Laverdure: I think you need to start with the fundamental question: ‘What does crypto provide to community banks that they cannot provide through some other means?’ You often hear about crypto proponents talking about crypto providing a faster payment mechanism, but those already exist in the regulated banking system. Last year the Automated Clearing House (ACH) network handled almost US$73 trillion worth of payments, almost a billion in same-day ACH payments, The Real Time Payments (RTP) network is online. FedNow is going to come on next year.
So, I think for many community banks that are seeking to offer some sort of faster payment solution, they’re prioritizing implementation for FedNow. And crypto, compared to the products that are out in the marketplace today, again, it just goes back to that fundamental question of: ‘Can it provide something to their consumers that’s not already met by something in the marketplace and within the regulated banking system?’
Lau: You’re absolutely right. When it comes from the American perspective, there’s no doubt this is the best served market in the world when it comes to financial products at very competitive prices. This is something that’s a dominant benefit to working with the U.S. in terms of trade, and then also being able to participate within the country.
And so if the world were to look at America as it does as the gold standard, what kind of gold standard in terms of regulations and policy must be in place to protect not only consumers here, but frankly lay the groundwork and potentially (create a) framework to help other participants around the world, for other jurisdictions to follow in terms of precedents, or at least use as an important reference to their own jurisdictional policies?
Laverdure: I mean, I can really only speak to the American experience — that’s the one that I know. But recognizing, of course, that given its nature, cryptocurrency being unregulated as it is, that really opens up the opportunity for different jurisdictions allowing for regulatory arbitrage, so we’ve encouraged domestic policymakers here to coordinate with their counterparts overseas, because it’s really important to have that baseline of a framework. And I know that there are some efforts under way with the Financial Stability Board to provide that baseline crypto-asset framework, and also one for global stablecoins. But there also needs to be some flexibility at the national level to be able to tailor regulations to suit their individual markets.
Lau: Yeah. The echoes of FTX’s collapse will undoubtedly have a ripple effect not just on investors, but also, as you said, regulators who are closely following the events as they unfold. You’re one of the stakeholders, obviously, as you’re participating in conversations here. We’ve recently seen the Department of Justice, the SEC, the CFTC, probing the failed exchange FTX. What type of regulatory response do you anticipate from, obviously, a traditional finance participant? Can you kind of clue us in as to what we can see from these regulators in response to what happened?
Laverdure: I’m not a regulator or part of the justice system. I think, like others, we recognize they have a role to play and we look forward to seeing the outcome of their investigations.
Lau: Totally get that. U.S. regulators are being asked for clearer rules on crypto trading. You’ve said that. Obviously, the lack of clarity is what exposed retail investors to FTX, which is under the regulatory supervision of the Bahamas, which obviously is not part of the U.S. framework. Would you say that regulators could have prevented FTX’s collapse if, notably, FTX.US is regulated by U.S. authorities? But if FTX were to exist here, do you think that it would have revealed itself sooner than later?
Laverdure: I think it’s still too early to speculate. We still don’t know the true cause of that collapse, so I think it’s really important for regulators and for law enforcement to continue their work, so the industry can learn from not only this episode, but of course, others as well.
Lau: Brian, in your view, what do you think needs to happen next, based on everything that you’ve observed of FTX and more?
Laverdure: I think we’ll see regulators and policymakers take a much closer look at the risk presented by crypto assets, particularly with respect to the financial system. We know that there are going to be more efforts to understand the risk presented by crypto assets. The Treasury Department should have a report next February on DeFi. I think there’s also going to be another one on NFTs. And I know that the FSB, the Financial Stability Board, recently said that they were going to make crypto assets a priority going into 2023. So, I think it’s just going to be much more of a laser focus on the risks and how they can be prevented or mitigated.
Lau: When you talk amongst your constituents — and these are community banks across the U.S. — have their views shifted in the wake of FTX’s collapse and what’s happened since?
Laverdure: No, I don’t think they’ve shifted. No, even before, again, you could see this from our comment letters and other policy papers that we’ve issued. Community bankers, they had concerns about this space before FTX, and those concerns remain even after FTX, so in that sense, our stance really hasn’t changed. We’ve been at the forefront, I think, in terms of trying to raise alarms about the use of crypto assets by bad actors. We know that this year alone, hackers affiliated with North Korea have stolen more than a billion dollars worth of assets. And that even after the Office of Foreign Assets Control sanctioned Tornado Cash, people continue to use it. These are serious concerns, and I think that’s why, going forward, we’re really urging policymakers to put national security and anti-crime measures at the forefront of any cryptocurrency policy.
Lau: When you say national security, there have been times when traditional finance and large banks have defied sanctions and things like that. So, how would you define national security, then, for crypto — in the same way that national security is defined for legacy financial institutions?
Laverdure: I think that the hacks that really kind of underline those concerns — and we know again from OPEC and actors like that — that North Korea is behind a lot of this, as well as Russian ransomware gangs. Either one of those is a significant threat to U.S. national security, so, I think, at the end of the day, that just highlights our big concerns in this space.
Lau: So the hackers are definitely the criminals here. Should the system itself be criminalized along with the people who are perpetrating the crime against it? Just trying to understand that.
Laverdure: No, we’re trying to just — as a part of this effort to come up with a clear regulatory framework — we just want that to be at the forefront, keeping in mind that, again, this is much bigger than any single actor, that there are a lot of different ways in which bad actors can and have used crypto systems. And that should be at the forefront as policymakers start to think about the next steps forward.
Lau: Theoretically, in your view, can legacy financial institutions leverage blockchain-based payment networks? Is there room for crypto to improve our existing financial system? Does it have to be bifurcated? Can it be incorporated? What are your thoughts?
Laverdure: Well, here you have community banks. They have to abide by what the regulators say. And we’ve received guidance from the OCC, the FDIC and the Federal Reserve. They’ve all issued bulletins about crypto asset activity, and they all say that banks that are thinking about this have to notify their supervisors, so it’s not really a question of, ‘Can they technically connect to these systems?’ It’s really, at the end of the day, what the regulations allow for. And then, does that solution actually meet any existing or future consumer need?
Lau: Got it. And finally, you mentioned that you were among those who supported — and obviously there’s divergent opinion here — but you were among those who supported banks being able to issue stablecoins or being the only ones who are able to issue stablecoins. Are the community banks in a position to issue stablecoins? And what would you use those stablecoins for? And progress so far there? What are your thoughts?
Laverdure: Well, at this point, we’re still waiting for that regulatory clarity. The President’s Working Group issued that report and that was their primary conclusion, but for the time being, there’s still a real lack of clarity about what exactly is permissible, including any activity related to stablecoin issuance or even holding reserves. So, it just goes back to the fact that there needs to be a clear framework in place for all actors in this space.
Lau: Right now, stablecoins drive 70% to 80% of transactions that we’re seeing amongst cryptocurrencies, amongst crypto exchanges in decentralized finance. If banks like yours, or your community banks, are the ones who are able to create and back the stablecoins and bring them to market, is there an understanding of the way that they’re going to be used, or do you anticipate that you’re going to create products or enterprise networks that also use stablecoins? What’s the go-to market if banks were to issue stablecoins, do you understand, like, the broader market in which they’re being used right now?
Laverdure: No, no. We do understand how it’s used today, and we know that there have been some thoughts about how stablecoins could evolve in the future — maybe to be payment stablecoins. I know some proponents have said that those could revolutionize cross-border payments or transactions like that. We have to counterbalance, I think, those ideas against some other things that we know. We know that there are other efforts under way to enhance the speed of cross-border transactions. The RTP network is working with RT1 to allow for near-instantaneous cross-border payments between the U.S. and Europe.
And even domestically, too, there’s concerns among some regulators about what the impact of payment stablecoins could have if they continue to be offered by non-bank providers. The acting chair of the FDIC spoke about this just a few weeks ago, talking about the potential for payments stablecoins to be highly disruptive to the community banking model in particular. So, this is a fast-moving space, and this is why it’s so important for, one, bankers to be aware of what’s going on, to study these technologies, to consider the risks and benefits; and then, two, again, for there to be clear guidelines about what is permissible, what is not permissible.
Lau: It’s been a heck of a year for both the traditional markets and also for the decentralized markets as well — crypto winter, as it were. But as it correlates also to the macro environment, where we’re seeing recessionary talk and definitely inflation hit home and hit wallets, what’s your prediction, Brian, for 2023?
Laverdure: I have no doubt that humans will keep me busy. This is quite the exciting sector in banking. There’s no shortage of issues and new developments, whether it’s in the more traditional areas of ACH or more exciting areas in terms of new things like central bank digital currencies and instant payments.
So, if I had to look into a crystal ball and think about what’s going to be really big in 2023, domestically, I think it’ll be the launch of FedNow and the spread of instant payment capability across the U.S. as more community banks come online. And we know that crypto assets will continue to be a really big issue among policymakers. And with those continuing efforts to research these issues, I expect that to add more fuel to the debate, so everything that we’re talking about today, Angie, I suspect we’re going to be talking about in six months. So maybe you could put, like, a reminder and check back.
Lau: I think we should have a standing date and check in six months from now. There’s no doubt. I totally agree with you. I think this debate rages on. I think there’s a really clear sense that there is value here in the technology. Just how is it going to be used and implemented is for everyone else to fight over and fight about.
Brian, I want to thank you so much for joining us. It was really good to understand from your very specific perspective and your perch there. And thank you for sharing the thoughts from ICBA. Really appreciate it.
Laverdure: Of course. Thank you, Angie. I really appreciate this opportunity to share our perspective.
Lau: It gives us a fuller picture. And thank you, everyone, for joining us on this latest episode of Word on the Block. I’m Angie Lau, Forkast Editor-in-Chief. Until the next time.