Bank customers and the United States economy could lose opportunities if a poor approach is taken to regulating blockchain technology, U.S. Federal Deposit Insurance Corporation (FDIC) vice chair Travis Hill told an audience at the Mercatus Center think tank on March 11. The United States is already at risk, Hill said, and the FDIC shares the blame for that.
Tokenization of bank deposits and other real-world assets (RWA) could make it possible to carry out financial transaction at any time with real-time settlement, Hill said. In addition, it would provide programmability of payments, making it possible to conduct intraday repurchase (repo) exchanges and improve settlement times for some bond issuances and numerous other transactions. Consumers could also benefit from using programmable payments in place of escrow.
Among the many open questions about tokenization, Hill mentioned the use, or not, of unified ledgers, blockchain interoperability and ownership rights as assets move along the blockchain. Furthermore:
“Global standards are being established, directly or indirectly, and with many non-U.S. jurisdictions actively engaged in this area, the United States risks ceding influence at this critical stage.”
Programmability could reduce settlement risks and Know Your Customer processes, but it could also allow consumers to move their assets quickly, aggravating bank runs. An “off” switch is needed to prevent that, Hill said.
Regulatory agencies attempted in the past to set consistent policies with little luck, so “instead, the agencies established processes under which institutions must engage with their regulator on an individual basis,” Hill said.
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Looking at FDIC regulations, which treat all transactions on a blockchain — whether they involve RWA or crypto — the same, Hill found them to be cumbersome and unequally applied:
“Institutions have spent months responding to a long stream of information requests, diverting attention away from developing new technologies and systems. […] The message being heard by the vast majority of the industry could be interpreted as don't bother trying.”
Guidance is needed from regulators, as is consistency so that deposits in any form are treated the same, Hill said. He criticized the Securities and Exchange Commission’s (SEC’s) controversial Staff Accounting Bulletin 121 (SAB 121), which requires financial institutions to treat crypto assets differently from any other kind of asset. The definition of crypto asset used in the bulletin is broad enough to include tokenized RWA, he said.
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