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Financial Services Law Insights and Observations


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  • Brainard discusses central bank digital currency at House hearing

    Federal Issues

    On May 25, Fed Governor Lael Brainard spoke before the U.S. House Financial Services Committee in a virtual hearing titled “Digital Assets and the Future of Finance: Examining the Benefits and Risks of a U.S. Central Bank Digital Currency.” According to the Committee’s memorandum regarding the hearing, the Fed defines a central bank digital currency (CBDC) as a “digital liability of a central bank that is widely available to the general public,” and though definitions vary, “understanding what distinguishes cryptocurrency from fiat government-issued currency is fundamental.” The memorandum also discussed the Fed’s publication of a discussion paper in January, Money and Payments: The U.S. Dollar in the Age of Digital Transformation, which calls for public comments on questions related to the possibility of a U.S. CBDC (covered by InfoBytes here). In Brainard’s prepared statement, she noted that the “rapid ongoing evolution” of digital assets “should lead us to frame the question not as to whether there is a need for a central bank-issued digital dollar today, but rather whether there may be conditions in the future that may give rise to such a need.” Brainard also stated that “there are risks of not acting, just as there are risks of acting.” While there has not been a decision on creating a U.S. CBDC, Brainard stated that “it is important to undertake the necessary work to inform any such decision and to be ready to move forward should the need arise.” Additionally, Brainard pointed to recent pressure on two widely used stablecoins and resulting market turmoil that “underscore the need for clear regulatory guardrails to provide consumer and investor protection, protect financial stability, and ensure a level playing field for competition and innovation across the financial system.” Brainard further stated that a U.S. CBDC could be a potential “way to ensure that people around the world who use the dollar can continue to rely on the strength and safety of the U.S. currency to transact and conduct business in the digital financial system.”

    Federal Issues House Financial Services Committee Privacy/Cyber Risk & Data Security Digital Assets Cryptocurrency Federal Reserve Bank Regulatory CBDC Fintech

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  • Hsu discusses stablecoins, pushes for crypto banks

    On April 8, acting Comptroller of the Currency Michael J. Hsu discussed stablecoin policy considerations in remarks before the Institute of International Economic Law at Georgetown University Law Center. Hsu called for the establishment of an “intentional architecture” for stablecoins developed along the principles of “[s]tability, interoperability and separability,” as well as “core values” of “privacy, security, and preventing illicit finance.” According to Hsu, one way to mitigate blockchain-related risks would be to “require that blockchain-based activities, such as stablecoin issuance, be conducted in a standalone bank-chartered entity, separate from any other insured depository institution [] subsidiary and other regulated affiliates.” Hsu also emphasized the need to evaluate whether stablecoin issuers should be required “to comply with a fixed set of safety and soundness-like requirements (as is the case with banks)” or be allowed to pick from a range of licensing options.

    Additionally, Hsu raised the question about how separable stablecoin issuers should be. “Blockchain-based money holds the promise of being ‘always on,’ irreversible, programmable, and settling in real-time,” he explained. “With these benefits, however, come risks, especially if commingled with traditional banking and finance.” Specifically, Hsu cited concerns that a bank’s existing measures for managing liquidity risks associated with traditional payments “may not be effective for blockchain-based payments,” which could conceivably accumulate over a weekend and “outstrip a bank’s available liquidity resources.” Hsu also raised concerns related to the current “lack of interoperability” should stablecoins expand from trading to payments, and stressed that “[i]n the long run, interoperability between stablecoins and with the dollar—including a [central bank digital currency]—would help ensure openness and inclusion.” He added that this “would also help facilitate broader use of the U.S. dollar—not a particular corporate-backed stablecoin—as the base currency for trade and finance in a blockchain-based digital future.”

    Bank Regulatory Federal Issues Digital Assets OCC Cryptocurrency Risk Management Stablecoins Fintech CBDC Blockchain

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  • Upcoming Treasury reports will highlight CBDC issues

    Federal Issues

    On March 22, Treasury Under Secretary for Domestic Finance Nellie Liang spoke before the National Association for Business Economics on topics related to stablecoins and a possible central bank digital currency (CBDC). As instructed by President Biden’s Executive Order on digital assets (covered by InfoBytes here), Liang announced that Treasury will partner with other agencies in the coming months to produce a series of reports and recommendations focusing on (i) the future of money and payment systems, with a discussion of CBDCs; (ii) financial stability risks and regulatory gaps posed by digital assets; (iii) the use of digital assets for illicit finance and associated national security risks; and (iv) international engagement supporting global principles and standards for digital assets and CBDCs. “Regulatory policy for new financial products may need to evolve, but should follow ‘same risk, same regulation,’ in the sense that regulations should be based on risks of the activity rather than the technology itself,” Liang stressed, adding that Treasury’s work will “complement” other agency efforts such as the Federal Reserve Board’s recent discussion paper which emphasized that any CBDC should ensure users’ privacy, have an intermediated model, be transferable, and prevent illicit finance (covered by InfoBytes here).

    Federal Issues Digital Assets Fintech Stablecoins Department of Treasury CBDC

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