Crypto and Digital Assets: Increasing regulatory momentum

Raising the discussion around crypto and digital asset policy and regulation

Amy S. Matsuo

Amy S. Matsuo

Principal and National Leader, Regulatory Insights, KPMG US

+1 919-244-0266

Financial services regulators are individually and collectively raising the discussion around crypto and digital asset policy and regulation. They highlight key regulatory issues that align with the President’s Executive Order, including customer/investor protections, financial stability, and national security as well as outline the parameters of a regulatory and supervisory framework.

In the weeks since the President signed an Executive Order directing federal agencies to report on crypto and digital assets, including consideration of potential new regulations and/or legislation, the federal financial services regulators have been actively outlining their perspectives on the risks and benefits associated with this rapidly expanding market. Recent releases and public statements follow.  

The Treasury Secretary provided remarks discussing the Administration’s approach to crypto and digital assets, including policy, innovation, and regulation. She highlighted that, while financial regulations need to be adjusted to reflect the new activities, products, and services that are enabled by technological advances, the updated regulations should be based on the risks associated with the new activities, products, and services rather than the underlying technology. As directed by the Executive Order, Treasury will collaborate with the White House and other regulatory agencies to produce “foundational reports” that address six policy objectives to “balance” the development of digital assets and related risks:

  • Protect consumers, investors, and businesses
  • Safeguard financial stability
  • Mitigate national security risks
  • Promote U.S. leadership and economic competitiveness
  • Promote equitable access to safe and affordable financial services
  • Support responsible technological innovation, including design considerations associated with privacy, human rights, and climate change.

In separate remarks, the SEC Chairman echoed Treasury’s position, stating “There’s no reason to treat the crypto market differently just because different technology is used.” He similarly suggested that the approach to regulation should be “technology neutral.” Areas within the crypto markets where the SEC is focusing its work include:

  • Crypto platforms - SEC staff is working on how to i) register and regulate these platforms “like exchanges,” including the application of investor protections; ii) register and regulate platforms that trade crypto-based security tokens and some commodity tokens (working with the CFTC); and iii) ensure the protection of customer assets held in custody.
  • Stablecoins - SEC suggests that stablecoins, by “offering features similar to and potentially competing with bank deposits and money market funds,” raise policy considerations related to financial stability and monetary policy, the potential for illicit activities (e.g., anti-money laundering, tax compliance, sanctions compliance), and investor protections, including issues related to conflicts of interest and market integrity.
  • Crypto tokens – SEC is seeking ways to ensure that crypto tokens that are determined to be securities register with the SEC, and that issuers of crypto tokens that are determined to be securities register their offers and sales of those assets with the SEC and comply with the disclosure requirements.

The OCC’s Acting Comptroller offered his perspective on stablecoins in recent remarks. He suggested that “getting stablecoins right from a regulatory policy perspective” was important to ensuring customer/investor protections and supporting the role of the U.S. dollar “as the base currency in a future digital economy.” He outlined three key policy issues that he suggests are “preliminary policy factors” to consider in the architectural development of the U.S. stablecoin system:

  • Stability - “Run risk” has been identified as a leading risk for stablecoins. Examples of approaches to promote stability and mitigate such risks include money market fund regulation, which is grounded in disclosure and holding requirements, and banking regulation and supervision, which is grounded in prudential standards to protect depositors. Regulators are also considering whether variability of requirements should be permitted across stablecoin issuers.
  • Interoperability - OCC suggests that a lack of interoperability among USD- based stablecoins would increase the risk of digital ecosystems being fragmented and exclusive and, as such, believes that ensuring openness and inclusion is supported by the interoperability between stablecoins and with the U.S. dollar (including a CBDC).
  • Separability - Regulators are concerned that “intraday liquidity risk”, which is defined as the risk associated with differently timed payments, can result from blending blockchain-based money with traditional banking and finance. The OCC suggests that one way of mitigating this risk and other 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.”

In a Financial Institution Letter, the FDIC instructed all FDIC-supervised institutions that intend to engage in, or are currently engaged in, any activities relating to crypto and digital assets, to “promptly” provide notification to their FDIC Regional Director describing the activity in detail. Supervised firms are encouraged to also notify their state regulators, as appropriate. FDIC will review the information, and any additional information requested, to assess risk considerations related to:

  • Safety and Soundnesswhere crypto assets and related activities may “present new, heightened, or unique credit, liquidity, market, pricing, and operational risks”
  • Financial Stabilitywhere the structure of a crypto asset or the interconnectedness of crypto-related activities could result in “runs” or destabilizing impacts to individual institutions following disruptions to certain transactions or activities
  • Consumer Protectionwhere consumers may not “understand the role of the bank or the speculative nature of certain crypto assets as compared to traditional banking products, such as deposit accounts,” or institutions may be at risk of ineffectively managing the application of consumer protection laws, including UDAAP regulations. 

The OCC similarly issued a requirement in November 2021 for national banks and federal savings associations seeking to engage in certain cryptocurrency activities, digital ledger, or stablecoin activities to i) notify the OCC of their intent to engage in such activities, and ii) receive OCC’s written notification of supervisory non-objection. (See KPMG Regulatory Alert, here.)

. As part of recent sanctions activity directed toward a “darknet market” and a virtual currency exchange, OFAC stated that it is committed to taking action against darknet marketplaces and virtual currency exchanges that “willfully disregard anti-money laundering and countering the financing of terrorism (AML/CFT) obligations and allow their systems to be abused by illicit actors.” Further, OFAC clarified that U.S. sanctions actions apply regardless of whether a transaction is denominated in traditional fiat currency or virtual currency. (See KPMG Regulatory Alert, here.)

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