U.S. regulation and processing of cryptocurrency

Translators: Liu Bin and Zhao Yunde, directors of the Financial Research Office of Pudong Reform Institute

Source: Didi Technology Information

This article is a speech by Michael Held, General Counsel and Executive Vice President of the Federal Reserve Bank of New York, at the Bank of International Settlement's Central Bank Legal Experts Meeting in Basel, Switzerland.

Thank you, Diego, for letting me talk about digital currency-in this field, I see myself as an intern, not an expert. Today, I will focus on the regulation of digital currencies in the United States, especially digital currencies issued by private institutions. As before, my views are those of myself, not the views of the Federal Reserve Bank of New York or the Federal Reserve System. To date, US policy makers and regulators have not developed a general framework for managing private digital currencies. This is a relatively new area and is not suitable for a comprehensive regulatory response. To be sure, the digital nature of the new private currency will pose challenges that policymakers must address. However, in my opinion, we spend too much time discussing the novelty of digital currency, forgetting that private currency is nothing new. Therefore, the theme of my speech today is best summarized in a famous saying: "History may not repeat itself, but it will always be surprisingly similar.

The past is not over, not even past

So let's review the history of privately issued currencies.

We started in Michigan in 1837, when the state legislature passed the first "free" banking law in the United States. After the free bank started business, it could issue paper money, that is, private currency, which could be redeemed with physical gold or silver. These notes are transferable debt, guaranteed by the credit of the bank issuing the bonds, plus assets such as bonds and real estate mortgages.

The decree allows bank organizers to set up a bank by submitting an application to the local financial director. They do not require approval from state banking regulators. (At the time, there were no federal banking regulators in the United States. In fact, the "free bank" era usually began when the U.S. Congress failed to reorganize the second bank before the expiry of the second bank's charter in 1836. Predictably, the result was chaos. State bank regulators aren't sure exactly how many banks have been set up. Some banks in Michigan were founded to issue banknotes, but never intended to redeem them. By 1839, almost the entire system had collapsed.

After closing a bank in Michigan, financial regulators faced a mess.

Some of these free banks are called "wildcat banks". They set up offices in remote areas where only wildcats are infested and it is difficult to exchange banknotes.

(Wildcat bank refers to the unsecured bank notes issued by banks before the establishment of the US National Banking System in 1864.) To tell the truth, the fate of free banks is not all bad. The Free Bank of New York is clearly doing pretty well. But the experience of Michigan and other states shows that dealing with private currency issuers that were weakly regulated at the time was risky. Banknotes of that era were always transferred at a discount. Different states had different valuation requirements for the assets that supported them. Banks also engaged in speculation: building hotels, roads, railways, and canals. They also engage in banking.

By the 1860s, Congress was tired of the free banking system. In 1863, Ohio Senator John Sherman condemned:

"In this country, we have all kinds of banking systems, these systems are designed by smart people, all these banks have the right to issue banknotes. There are so many banks. A unified national currency is not possible because it Its value is often influenced by its issuers. There are no common regulators; they rely on different systems. There is no censorship or control over these banks. They lack harmony and coordination. "

The National Bank Law authorizes the establishment of national banks that can issue national bank notes. This is an effort to promote the unification of private currencies. It is an urgent need of the government during the civil war. Unlike unreliable bank notes, national bank notes are generally backed by federal government bonds and other currency deposits, such as the "US dollar" issued by the U.S. government, which in each case is held by the U.S. Treasury and they are in contrast to other Money circulates equally. The National Bank Act also promoted the separation between US banking and commerce, which may eliminate some of the more speculative banking activities.

Federal government intervention and stricter regulations mean that national banks and their banknotes are safer and more replaceable than their previously unreliable banknotes, and the United States is turning to national bank notes, plus the new state bank notes The unfavorable tax treatment means the demise of unsafe banknotes.

Seventeen years later, the establishment of the Federal Reserve system, the emergence of a central bank currency, and the promotion of deposits by banks meant that American private money had disappeared in decades.

Three years old see old

Granted, this is a fairly rough history of the U.S. currency and banking industry, but do you know what I want to say. Many similarities can be seen between today's digital currency and previous eras of bank note issuance. Digital currencies have been developed without a comprehensive regulatory system. There are many types of digital currencies, and their characteristics are different. Many different entities have issued digital currencies. According to a source, there are currently more than 3,000 digital currencies, but I doubt if anyone really knows the exact number.

Although we do not see a pile of junk as a support behind the digital currency issuers, we see that digital currencies are actually designed without asset support—Bitcoin is the most obvious example—and others Digital currencies backed by highly volatile digital currencies–especially for those who value security very much, as well as figures based on Donald Trump, Vladimir Putin, and Kanye West currency.

Of course, the analogy between the current era and the wildcat era is not perfect. History is similar; but history does not repeat itself.

Compared to the wildcat era, various federal regulators have shown a willingness to supervise digital currencies with existing regulatory tools. However, policy makers and regulators are still monitoring the development of digital currencies, and we have not fully formulated a consistent policy response. However, whether we like it or not, we are starting to face at least two issues that are similar to those that policymakers addressed during the decline of the wildcat era:

1. Should governments limit private currencies that are insecure or particularly unstable?

2. Should governments limit private currency issuance to strictly regulated institutions so that governments can encourage or enforce certain desirable features?

As I have already said, current US laws do not directly answer these questions. Digital currencies can be divided into multiple categories: commodities, securities or other instruments. How to classify digital currencies depends in part on the functional use of digital currencies, and in part on various legislators and regulators that have the power to regulate digital currencies.

The Financial Crimes Enforcement Network (FinCEN) is the main agency responsible for enforcing U.S. anti-money laundering laws and is one of the first agencies in the United States to issue a guide to digital currencies. The Financial Crimes Enforcement Network specified in 2013 that if digital currencies replace real currencies or have the same value as real currencies, then the senders and exchanges of digital currencies are the money service agencies stipulated by the Financial Crimes Enforcement Network. Therefore, any institution engaged in digital currency transfer or exchange business must comply with FinCEN requirements to establish an anti-money laundering program, including record keeping, reporting, customer identification and verification requirements. FinCEN's early entry into the field was to prevent digital currencies, like other forms of payment, from being used for evil purposes.

2017. Jay Clayton, chairman of the U.S. Federal Securities and Exchange Commission (SEC), which oversees securities, issued a statement on digital currencies and initial coin financing (ICOs). Chairman Clayton believes that "under U.S. law, tokens and services that have the potential to earn potential benefits based on the management of a startup or other person comply with the definition of securities in U.S. law." It is clear that exchanges, investment institutions, investment consultants, and dealers conducting business in digital currency in the form of digital asset securities will be subject to securities laws. The guide clearly states that digital currencies as securities will be subject to US securities laws, but it may not always be clear where we draw this line.

There are many products that blur the line between currency and securities, which is not new. Take, for example, a deposit slip. In 1982, the U.S. Supreme Court analyzed whether certificates of deposit were securities required by certain US anti-fraud laws. The court's conclusion was negative. In doing so, the court recognized that the most important difference between bank-issued deposit slips—banknotes—and other long-term debt was the overall oversight of the banking system. The court's conclusion was a wise conclusion more than a century after the era of "unsafe" banking: legislatures cannot tend to treat currency in the banking system as something else, because there is no need to do so.

At least for now, the development of digital currencies does not seem to be that strong. Without a regulatory framework designed for digital currencies, US regulators are responding to digital currency abuse, rather than proactively addressing risks. For example, the US Commodity Futures Trading Commission (CFTC) oversees futures and derivatives contracts, and uses its enforcement powers to fraudulently purchase or sell goods to block a so-called digital currency scheme. The organizer of the plan claims that the problematic digital currency, My BigCoin, is backed by gold and is actively trading, but the Commodity Futures Trading Commission concluded that neither of these aspects is true and that payments to customers are from other fraud Organizers have misappropriated about $ 6 million in client assets from the funds received by the victims of the program.

My Big Coin seems to be a modern Wildcat currency, but the plan was discovered only because the US Commodity Futures Trading Commission (CFTC) could regulate it as a commodity. We are fortunate that today, the US Commodity Futures Trading Commission (CFTC) has the powers granted by the market to combat fraud in the US commodity market, which was not possible in the previous era of insecurity.

At the same time, banks, as the key institutions for holding and transferring funds supervised by our federal regulators, have basically not participated in the holding, transfer, or issuance of digital currencies. The US federal banking regulators have not explicitly stated that banks are allowed to participate in these activities. The Office of the Comptroller of the Currency (OCC) tried to develop a special purpose license, the so-called "fintech license"-probably to include some of these activities under the supervision of the OCC, but it has been stuck in signing these special purpose licenses with the US states In the lawsuit, these states want to approve these activities in accordance with local law.

In addition, the Bureau of Consumer Financial Protection has the authority to establish rules on certain consumer accounts and payment products. The Bureau has decided to further analyze digital currencies and has not recently amended its Regulation E. Include digital currency in its regulatory scope.

It is true that states in the United States have started to formulate laws and regulations for digital currency business. To give two examples, New York and Wyoming have policies for digital currencies. However, there is little coordination at the state level, which highlights the inconsistencies in the state's treatment of digital currencies, which may lead to risks and may also lead to “malignant competition” in licensing standards, which may be reminiscent of The age of security (wildcat). The challenges that countries will face when formulating sound rules will only be magnified in terms of digital currencies, which are often borderless.

If you are as worried as I am, will you worry that we will delay the introduction of effective solutions until the old solutions cannot solve the emerging problems? If the digital currency reaches a point of critical size, how worried will our response be? Governor Quars recently emphasized the latter issue in a speech to the European Banking Federation. He pointed out that stablecoins do not currently pose risks to financial stability, but they have potential for scale, and from the perspective of financial stability, regulatory challenges may be raised in the future.

But knowing that U.S. regulators are already addressing concerns about fraud and other forms of misconduct, and recognizing Governor Guars' concerns about financial stability, is it necessary for us to start identifying areas of focus that warrant more proactive regulation? Pablo Hernández de Cos, chairman of the Basel Committee on Banking Supervision (BCBS) and governor of the Bank of Spain, said in November that digital currencies "cannot reliably perform the standard function of currency as a A medium of exchange or a store of value is not secure. "This sounds like a problem.

We have dealt with similar issues before. Under the National Bank Act, the United States chose to reform its currency system and adopted a new regulatory mechanism for national banks—that is, institutions that may issue stable private currencies (that is, national banknotes) and establish requirements that require these issuers to A more secure government issue bonds to support its currency. These measures help ensure the stability of private currency issuers and their currencies, but there are other benefits that are easily overlooked: we curb a product we don't want to let them develop-unsafe banknotes (i.e. Tax); some key players in the system, especially custodian banks and trust companies, are already regulated institutions; bank notes have a certain degree of transparency, that is, holders are entitled to receive payments; no matter what point of view Federal laws and regulations are everywhere.

In response to the development of other widely used financial products, we have also developed a comprehensive regulatory plan for these products, including recent work on the supervision of swap transactions. If digital currencies reach critical mass, we may want to learn from these efforts and consider whether tools that regulate systemically important activities are appropriate for this purpose. The Dodd-Frank Act's identification of systemically important financial institutions may be instructive here, whether or not it applies directly to digital currencies. In this process, the Financial Stability Regulatory Commission (FSOC) has the authority to designate to strengthen the supervision of certain financial institutions, financial market infrastructure and payment, clearing and settlement (PC) activities. To a certain extent, FSOC determines the organization or Whether the activity is systemically important.

Although the authority in the Dodd-Frank Act is limited in some ways, it applies only to certain systemically important activities, and the identification process requires coordination between the regulatory body and the relevant administrative procedures. Flexible because it takes into account behavior-based regulation and prudential regulation of certain institutions. I'm not saying that any digital currency is mature enough to be considered under the Financial Stability Regulatory Commission's determination procedures; it's just that a similarly flexible solution involving coordination and collaboration with multiple regulators may be necessary.

Road ahead

In applying past lessons to modern society, consider the following issues when determining whether a broader regulatory plan is reasonable:

1. First of all, who should be authorized as the issuer of digital currency, or as an intermediary who can hold or transfer digital currency on behalf of the holder? Are existing regulations sufficient to cover every institution? If not, should we consider expanding the scope of regulation to address each issue from a prudent regulatory perspective. Doing so will provide us with a way to address the broader risks that each party may pose to holders or the entire system.

2. Second, from a regulatory or policy perspective, are there any desirable or undesirable characteristics of digital currencies? If this is the case, should we take some restrictions or incentives to avoid recurrences similar to those of the previous era of insecurity? Shouldn't our goal be to clarify certain basic characteristics, such as clarifying the rights of digital currency holders and the asset attributes that support digital currency?

3. Third, are there any key activities that are critical to the operation of digital currencies and require special attention from regulators? These measures may include the creation, distribution, destruction or transfer of digital currencies, or they may include critical infrastructure, such as the technology that supports a particular digital currency. If these key activities are performed by entities outside the scope of regulation, should we fill this gap in regulation.

4. Fourthly, should we agree on common aspects of cross-jurisdictional aspects in terms of improving certain aspects of our regulatory approach? Digital currencies can be designed for use across borders. The main subjects may be located around the world. If coordination is to be universal, or at least close to universally effective regulation, isn't coordination an effective way? The Financial Stability Board and the Basel Committee on Banking Supervision may address some of these issues, but it is not known what conclusions they will draw.

5. Finally, should we consider looking at these activities from other perspectives? Generally, we must consider the protection of digital currency holders from unfair losses from the beginning and the possibility that certain digital currencies pose risks to financial stability. Are there other factors we need to consider?

This is not easy. Some people may look at the problem above and want a faster, ready-made solution. I can now hear their voices: "Why not put this activity in the banking system and leverage a more robust regulatory structure in the banking system?" I think we should consider this, but banking regulation may not be suitable for this purpose. History will repeat itself, but it will not repeat. This is the last time I used that sentence. Therefore, while we consider where banks should or should develop in the future, we should also consider some more basic issues:

1. What is the most practical method? 2. What approach will allow us to strike the right balance between functional regulation and risk-based regulation? 3. What methods are most neutral to technological change? 4. What is the best way to see the problem clearly (recognizing that each model has its shortcomings)? (V) What methods will continue and go through the next innovation cycle?

I mentioned the SEC before. The US Securities and Exchange Commission (SEC) uses an incredible test set by the Supreme Court nearly 90 years ago to analyze digital currencies, but it's still very important for what the SEC does, and it's worth the effort. You might be surprised that I can't answer what digital currency regulation will look like in the next 90 years, but I hope to have the opportunity to discuss this with some of you. thank you all.