Digital Assets and the Future of Finance: Understanding the Challenges and Benefits of Financial Innovation in the United States

Chairwoman Waters, Ranking Member McHenry, and distinguished Members of the Committee, the American Bankers Association (ABA) appreciates the opportunity to submit a statement for the record for the hearing titled “Digital Assets and the Future of Finance: Understanding the Challenges and Benefits of Financial Innovation in the United States.” The topic of today’s hearing is an important one.

We appreciate the Committee’s attention to these important issues. The digital asset marketplace is growing rapidly. The total market capitalization of all cryptocurrencies (including stablecoins), by some estimates, reached over $3 trillion in November of 2021. Digital assets have the potential to be a catalyst for change in traditional financial markets, with significant implications for our financial system, economy, markets, and most importantly for the American consumer.

The origins of cryptocurrency were driven by the desire to build a “trustless” financial system, where parties can transact directly with each other without the need for a trusted third party. It is ironic, therefore, that as interest in cryptocurrencies and other digital assets continue to grow, consumers engaging with digital assets most often seek out trusted financial institutions to act as financial intermediaries. ABA believes that customers who choose to access digital asset markets will be best served when they can do so through fully regulated banks where they are afforded robust consumer protection. To accommodate this customer demand, banks are actively evaluating ways to safely and responsibly allow their customers to buy, hold, and sell digital assets through their existing banking relationships.

Today, the digital asset marketplace can feel like the Wild West—where there is seemingly limitless opportunity for growth, but the risks are not always adequately addressed. For example, hundreds of millions of dollars in cryptocurrencies can go missing on a lost USB drive, the world’s largest coin exchange can go bust after the theft of 850,000 bitcoin, stablecoin issuers misrepresent the reserves backing their coins, and crypto is the currency of choice in ransomware attacks.

By comparison, banks, which have been around for hundreds of years and understand the risks inherent to their businesses, have in place comprehensive risk management procedures. Moreover, banks are subject to a robust set of safety and soundness regulations, adhere to stringent consumer protection laws, and maintain robust antimoney laundering practices. In addition, banks are subject to rigorous oversight and supervision to ensure compliance with these and other requirements. These factors, in combination with deposit insurance from the Federal Deposit Insurance Corporation (FDIC), make banks a safe place for consumers to store their funds.

This level of oversight and supervision should be applied to banks and non-banks alike to ensure all customers are protected equally, regardless of where they engage with the financial marketplace. As non-bank technology firms begin offering banking products and services through digital channels, Congress should ensure that these activities are appropriately monitored, emerging risks adequately captured, and all applicable legal requirements met.

Ultimately, a level regulatory playing field in digital assets means a simple proposition: offer bank-like services, receive bank-like oversight. In other words, as Acting Comptroller Michael Hsu has emphasized, “Because you do, you are; and because you are, you do.” Securities and Exchange Commission Chairman Gary Gensler is right to observe that the crypto sector is “at the level and the nature that if it’s going to have any relevance five and 10 years from now, it’s going to be within a public policy framework. History just tells you it doesn’t last long outside.” Permitting digital asset activity to occur outside the regulatory perimeter poses risks to consumers and the financial system.

To aid the Committee in its consideration of the complex issues surrounding the three main types of digital assets—cryptocurrencies, stablecoins, and central bank digital currencies—we have appended to this statement the following four documents:

1. The comment letter the ABA submitted in response to a recent request for information by the FDIC on banks’ use of digital assets.5 In this letter, we offer recommendations for regulators on how banks can responsibly facilitate customer access to these markets, arguing that customers who choose to access these markets are best served when they can do so through banks that are subject to rigorous oversight and supervision to ensure compliance with appropriate safety and soundness and consumer protection requirements.
2. The ABA’s response to the recent Basel Committee’s consultation on the prudential treatment of cryptoasset exposures.6 In this letter, we address the prudential treatment of banks’ cryptoasset exposures and note that the overall stability of the global financial system will benefit from the transparency that will result by conducting a significant share of the cryptoasset market through supervised financial institutions, as opposed to being driven outside the banking system.
3. An assessment of the report on stablecoins by the President’s Working Group on Financial Markets, together with the FDIC and the Office of the Comptroller of the Currency. In this document, we support the recommendations made by the PWG to require stablecoin issuers to be insured depository institutions subject to appropriate supervision and regulation at the depository institution and the holding company level and require custodial wallet providers to be subject to appropriate federal oversight, as well as require stablecoin issuers to comply with activities restrictions that limit affiliation with commercial entities.
4. The statement for the record that the ABA submitted on CBDC to the Subcommittee on National Security, International Development, and Monetary Policy of the House Financial Services Committee.7 In this statement, we argue that the retail use case(s) for CBDC introduce risks far in excess of possible benefits because (1) a high proportion of American consumers have retail bank accounts, and (2) electronic payments in U.S. are pervasive, highly efficient and competitive. Moreover, a retail CBDC that competes for commercial bank deposits would adversely affect bank cost of funding, and ultimately, the cost of credit to the real economy by reducing commercial banks’ ability to make loans. We further note that a wholesale CBDC model also raises a number of difficult policy issues, but is beyond the scope of this statement. Depending on its structure, including whether such a payments system would be interoperable with existing systems, this could adversely affect U.S. payments systems.

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