New York Fed’s general counsel on US regulations and approaches to cryptocurrencies
Remarks by Michael Held, executive vice president and general counsel, at the BIS Central Bank Legal Experts’ Meeting, Basel, Switzerland, December 3 2019
Policy makers and regulators in the United States, to date, have not developed an overarching framework for regulating private digital currencies. The field has been seen as too new for a comprehensive regulatory response. To be sure, the digital nature of new private currencies will raise challenges to which policy makers must respond. In my view, however, we spend so much time wrestling with the novelty of digital currencies that we forget that private currency is nothing new.
In applying lessons learned from the past to the modern era, one path forward might be to consider the following questions in determining whether a broader regulatory scheme is sensible:
1. First, who should be authorized to act as an issuer of a digital currency or as an intermediary that can hold or transfer a digital currency on behalf of a holder? And, is existing regulation adequate to cover each? If not, should we consider expanding the regulatory perimeter to address each from a prudential regulatory standpoint? Doing so would provide us with an avenue for addressing risks each may pose to holders or the system more broadly.
2. Second, are there certain features of digital currencies that are either desirable or undesirable from a regulatory or policy standpoint? If so, are there restrictions or incentives we should adopt to avoid a recurrence of a landscape that resembles the wildcat era? At a minimum shouldn’t we aim for clarity on certain essential features, such as clarity on the rights of digital currency holders and the nature of assets that back a digital currency?
3. Third, are there key activities that are cardinal to the functioning of digital currencies that require special attention from regulators? These may include actions to create, distribute, destroy, or/and transfer digital currencies, and may also include key infrastructures, such as the technology that underpins a particular digital currency. To the extent that these critical activities are performed by actors that are not within a regulatory purview, should we fill this potential gap in oversight?
4. Fourth, should we agree on a common approach across jurisdictions on least some aspects of a refined regulatory approach? Digital currencies can be designed to be used across borders. Key parties may be situated across the globe. If we are to reach ubiquity in regulation, or at least something approaching it, isn’t coordination the way to do so? The Financial Stability Board and the Basel Committee on Banking Supervision may address some of these questions, but it’s too soon to know what they will conclude.
5. Last, should we consider other lenses through which to view these activities? Common sense dictates that we begin with an approach that considers protections for holders of digital currencies against unfair losses and the potential for certain digital currencies to present risk to financial stability. Are there other factors for us to consider?
This is not easy stuff. Some might look at this list, and want a faster, ready-made solution. I can hear them now: “Why not just put this activity in the banking system and borrow a more robust regulatory structure?” I think we should consider that, but bank regulation may not be fit for purpose.
So, at the same time we consider what banks will or should be going forward, we also should consider some more fundamental questions: (i) What is the most practical approach? (ii) What approach gives us the right balance of functional and risk-based regulation? (iii) What approach is the most neutral to technological change? (iv) What approach provides the clarity to the greatest extent possible (recognizing that every model will have its faults)? (v) What approach will last to and through the next cycle of innovation?
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