STABLE Act, the OCC, and Big Banks

The arguments are set, the ring is created, and the opponents have stepped in.

TLDR: How to make the STABLE Act, OCC, and Banks all work together? Allow stable coin issuers to hold assets at banks and through which give stable coin issuers fractional banking provisions to stabilize and foster them. This will provide banks a new avenue for their services and aligns these potential competitors. Remember, progress usually lies not where all people are happy, but where no one is angered.

Let’s step through this piece by piece.

Introduced by House Reps, the STABLE Act is intended to reign in and provide regulation to stable coins and the burgeoning cryptocurrecy industry. This act, is said to make, “Any entity that wants to issue something that walks and talks like money or like a deposit should be regulated like a depository institution,” with the goal to “Preventing cryptocurrency providers from repeating the crimes against low- and moderate-income residents of color traditional big banks have is critically important.” — Rashita Talib on Twitter. The pains here for stable coin entities is the mountain of regulations that would then be applied to their operations. Even if nothing would change how they function, getting the necessary checks from legal bodies would take eons, at best, and slow innovation on crypto in the US.

Enter participant number two, the OCC. The Office of the Comptroller of the Currency head, Brian Brooks, has had a relatively favorable perspective on crypto, recognizing this new industry and not wanting to stifle its innovation he has said chartered banks can provide custody services for crypto firms. This comes from the perspective that banks provide safe keeping, and crypto needs safekeeping as well. Thus, extending a normal bank operation to these new firms. Looking over to the legal marijuana trade (who have to operate in cash as it is still federally illegal so banks cannot interact with those firms) to see how keeping firms outside of the system can cause more harm then good. The OCC’s move to help bring crypto into the banking fray has received plenty push back, but this decision has supported the creation of a connection between crypto and the current banking institutions.

Lastly, there are the big banks. The existing titans that have a close tie with Washington, Wall St., and Main St. to keep the pipes of our system operating as expected and as history has dictated. Their main relationship is with the Federal Reserve and their ability for fractional banking through federal and state banking charters. This portion of their operations is how the Federal Reserve acts on their objectives of issuing stimulus; they give money to banks and banks lend it out keeping a few dollars in their ‘vaults’ as reserves. Are big banks pro crypto? Who knows, there is perhaps a threat to their operations on the horizon as stable coins operate more and more as a traditional dollar. It would be logical that they would want to crush crypto from arising as a real competitor, but can be a partner if structured as such. Bringing the process of reserve requirements and oversight to stable coin issuance’s while avoiding creating an entirely new connection between financial assets (coins) and the financial monetary system (Fed).

So there we have it. Legislation aimed to regulate and hold a new industry to very expensive and challenging regulation (STABLE Act). An office within the government that allows banks to interact and provide their primary services to crypto firms (OCC). Lastly, our traditional private players with licenses to insure deposits, fractional banking, and a tight connection with the Federal Reserve as the operators of the mechanics of dollar issuance's (Banks).

The right answer is likely somewhere in the middle, where no one is happy, but everyone gets something. We need to protect those who use stable coins and crypto banking from bad actors. Yes, that sounds reasonable, if a new industry is going to be based on stable coins, stabilizing and putting safeguards around them is a smart first step. We need to allow this new industry to use our existing banking system as intended so it can grow in a controlled manner without eliminating its potential. Again, this sounds great and avoiding the mistakes of the marijuana trade where individual states dictate their own legislation toward these products (see Wyoming) while operating outside the federal system.

A happy medium here is to allow crypto stable coin firms to keep their deposits at big banks, and giving them the ability for fractional banking. This means any stable coin firm that has 10 million is USD, can deposit in a traditional bank and issue, say 10X, its stable coins. That is currently how traditional banking works, and reserve requirements are how much hard currency do we need compared to how much we create. We can provide this same reserve requirements to stable coins that current banks operate on by using the current banking structure. Banks would be onboard as its new customers and potentially invest in the space. Regulators would have the opportunity to use the existing frameworks for reserve requirements and auditing standards that could be easily applied, and the Federal Reserve, theoretically, will have new processes that extend into the crypto world. Using the current banking structure to extend into crypto through stable coins would be an extension of how money currently works by allowing crypto to re-use most of the existing frameworks and regulations without spending vast amounts of time hammering out legal provisions.

Clear, concise, and principled regulation is the happy medium to providing the motivation for innovation while keeping the boat from rocking too hard too fast. More broadly, the US would be well served by these relationships to maintain their influence and dominance as the worlds reserve currency with direct crypto ties to USD. Would the Fed go along with this process, or issue their own CBDC in the future? Possibly, but for the time being, allowing stable coins to use the current banking system with its checks and balances on reserves is a logical next step.