House Republicans Suspect Prudential Regulators Have "Coordinated Strategy" to De-Bank Digital Assets
Commentary by Steven Lofchie
Republican leadership from the House Financial Services Committee requested information from the federal prudential regulators to help them determine whether there is a "coordinated strategy to de-bank the digital asset ecosystem in the United States." The letters were signed by House Financial Services Committee Chair Patrick McHenry (R-NC), Digital Assets, Financial Technology and Inclusion Subcommittee Chair French Hill (R-AR), and Oversight and Investigations Subcommittee Chair Bill Huizenga (R-MI).
In separate letters addressed to Federal Reserve Board Chair Jerome Powell, FDIC Chair Martin J. Gruenberg and Acting Comptroller of the Currency Michael Hsu, the legislators expressed concern over the "resurgence of coordinated action" among banking regulators to "suppress innovation" and make banks "hesitant" to offer banking services to digital asset firms.
Specifically, the legislators referenced:
- Interpretive Letter #1179, which was issued by the OCC in 2021 and directed banks to only provide services involving digital assets if (1) they can assure in writing that such services are provided in a "safe and sound manner" and (2) banking regulators provide a written non-objection in response (see previous coverage); and
- a joint statement issued by the FRB, the FDIC and the OCC in January 2023 that warned banks against providing services to "crypto-asset sector participants" (see previous coverage).
In order to assess the banking regulators’ approach to digital assets, the legislators requested all non-public records and communications between and among (i) the prudential regulators’ employees and financial institutions and (ii) the prudential regulators’ employees and state regulators with respect to both the OCC's 2021 interpretive letter and the 2023 joint statement. The legislators requested that the responses be submitted no later than May 9, 2023.
Commentary
While the de-banking of digital assets is a significant issue, the larger question concerns the ability of financial regulators to deal with innovation. We are many years into the advent of digital assets as a financial product, yet there has been little of no progress in modifying existing rules to fit the product. In general, when nonbanks have developed interesting retail lending products, the response of the regulators has been to bemoan that the products are not provided by more heavily regulated banks.
The next big thing, many times bigger than digital assets, is AI and machine learning. Various federal regulators recently put out a statement affirming their commitment to "responsible innovation" in AI. But the obligations that they would impose on developers of AI systems are either impossible to meet (prohibiting AI systems to operate as a "black box") or totally ambiguous (prohibiting the use of "unrepresentative or imbalanced datasets, datasets that incorporate historical bias"). It seems clear, at this point, that all AI has a significant black box element. It also appears impossible to know what datasets the regulators believe incorporate or do not incorporate historical bias. In short, the regulators are simply not engaging meaningfully with AI nor are they providing meaningful guidance.
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