If Christopher Giancarlo was “Crypto Dad” and Hester Peirce is “Crypto Mom,” will the U.S.’s new top bank regulator become “Crypto Uncle”?
Brian Brooks, the former Coinbase legal chief, took office as Acting Comptroller of the Currency (OCC) at the end of May, barely two and a half months after being appointed First Deputy at the federal banking agency. In that time he’s already publicly suggested a federal payments charter for fintech companies, asked state and local governments to consider lifting COVID-19 lockdowns to protect the banking system and published a request for public input on how banks look at crypto.
The first proposal might be Brooks’ most ambitious: creating a federal regulatory framework for tech firms offering some services traditionally offered by banks, something industry advocates have long sought but recognized as politically hazardous. A single federal framework would preempt the 50 different state-level money transmitter licenses that companies, including crypto exchanges, currently have to obtain.
This state-by-state requirement requires exchanges to roll out services slowly, dependent on the different approvals rather than their technology stacks and scalability. Since the OCC’s founding in 1863, banks under its charge have been allowed to operate across state lines, but nonbanks looking to operate nationally must secure the numerous state licenses.
Brooks told CoinDesk he views the OCC’s role as keeping up with developments in technology and other areas, and ensuring the national banking regulatory framework remains flexible to new tools and how they are being used.
“My job here is not to protect incumbents, and it's not to preserve the status quo,” Brooks said. “You know, I'm not curating a history museum here. The job I have is to make sure that the bank charter’s flexible enough to maintain a safe, sound, strong American economy and the shape of banking has to be flexible to accommodate.”
Part of this evolution includes the fact that banks aren’t the only entities providing what were traditionally seen as banking services, he said, noting technology companies like Stripe provide payment and lending services. Banks themselves have been changing as well over the past several decades: There are banks that aren’t “significant depositories,” including trust banks and credit card banks. There are also more entities that operate nationally, rather than just on the state level.
Some of his ideas, including the payments charter, stem from this need to keep up with the times, he said.
Asked what other areas of crypto the OCC might look into, Brooks mentioned the wild frontiers of decentralized finance (DeFi) and lending as two examples.
“DeFi is in its real infancy...none of that's yet scaled, and yet it is the most interesting thing happening in crypto,” he said. “Is it possible to deliver a full suite of financial services by algorithm, without any central ledger keeper?”
Brooks also said a digital dollar, which he has advocated in the past, is something that should be developed by the government with private entities.
A digital dollar issued and maintained solely by the Federal Reserve “misses the promise of the digital dollar” because it would be a centralized token that is not much different from another electronic ledger, he said.
National payments charter
Brooks’ suggested payments charter would essentially let fintech companies operate under a single national regulatory regime, rather than seek 50 different state-level money transmitter licenses.
“National platforms are bigger, more stable, more competitive for scale businesses,” he said, adding:
The OCC’s last attempt at fintech charter was a third rail of sorts.
Proposed in 2016, it would have explicitly allowed fintech firms to apply for bank charters and provide direct lending services. The charter was blocked by a number of state regulators, including the New York Department of Financial Services, and remains in legal limbo while it sits before the United States Court of Appeals for the Second Circuit. At least one federal judge has already ruled against the OCC.
Brooks anticipates some opposition from state-level regulators if he were to formally pursue a payments charter, and he said at least some of this opposition will come from the fact that states generate revenue by licensing entities.
“If a state is currently getting paid and all of a sudden there's a federal agency offering [companies], you know, more consistent supervision across the country, that becomes a threat to their revenue model or a threat to their.. jurisdiction” he said.
In Brooks’ view, this shouldn’t be a concern for the states.
The U.S. already has had a dual-banking system in place since around the time of the Civil War when the OCC was created, he noted.
“There are many, many banks chartered by the states out there because it's the right business model for what they're focused on,” he said. “If you're focused on the local and regional business, it makes sense to have a state charter. If you're focused on a national business, it probably makes more sense of a national charter, and ... I don't think there's any tension between those two concepts.”
Broadening scope
Brooks is also interested in seeing how existing banks address crypto and DLT, and whether any of these entities are engaging with or incorporating new tools built on blockchain.
Last week, the OCC published an advance notice of proposed rulemaking (ANPR) soliciting feedback on a number of issues, including how crypto and distributed ledger tech interact with the existing banking system. While the notice explicitly excluded feedback on the payments charter, Brooks said he is still looking for comments on that proposal as well.
In particular, he expects feedback on what requirements or regulations would be needed to make the charter effective, such as if a company needs access to the Federal Reserve’s payment rails to be able to provide better payment services.
“My thought is if those companies are doing those services which historically were done by banks, and those companies were having to cobble together the legal structure to operate on, you know, that is a patchwork of state-by-state stuff,” he said. “Maybe what makes more sense is to bring those companies into the supervised banking system.”
The ANPR was already being developed prior to his arrival at the OCC in mid-March, he said. Crypto companies had previously reached out to the regulator to discuss bank charters, usually with respect to becoming qualified custodians (while there are regulated crypto custodians in the U.S., the vast majority have state trust licenses rather than a federal approval).
Ultimately, Brooks said he hopes to reform how banks treat crypto companies in the U.S., and help “legitimate” companies access banking relationships. JPMorgan Chase made headlines last month when The Wall Street Journal reported it had provided banking services to Coinbase and Gemini. But in general only a handful of smaller banks have been willing to openly service the sector.
“I think there is a perception at banks that somehow crypto is a disfavored asset class, and you shouldn't even provide a payroll account or a corporate deposit account for a company engaging crypto,” he said. “And so what I want to do is make sure that we systematically identify what the impediments are to legitimate companies getting banking relationships, whether it's corporate banking relationships, whether it is custodial services by banks to crypto companies or otherwise.”
He stressed that he would only want companies that are fully compliant with regulations. For example, he would support providing banking relationships to stablecoin issuers that “are properly audited, properly reserved and everything else.”
“We don't want to see a situation blow up as happened with Tether’s original bank in Puerto Rico,” he said, referring to Noble Bank, which serviced Bitfinex and Tether in 2018 amid questions as to whether the USDT stablecoin was fully backed 1-for-1 with dollars. (Noble Bank listed itself for sale in late 2018 after reportedly losing the stablecoin issuer as a client.)
Going mainstream
While Brooks did not explicitly say or indicate he was hoping to bring crypto mainstream during his time at the OCC, his contemplated actions would appear to make that a goal.
Outside strict regulatory updates, he said he’d like to help educate the broader public about crypto.
“I think there is an education that is required. You know, you've heard what the President [of the United States] has said about bitcoin and his skepticism about bitcoin as a store of value equivalent to the dollar. And you know those are concerns many people have,” he said. (President Trump said he was “not a fan” of bitcoin or other cryptocurrencies in a series of tweets last year.)
Regulatory agencies by and large have the expertise they need around the space, Brooks said. Not just the OCC – the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) have also developed a store of expertise. SEC Commissioner Peirce and former CFTC Chairman Giancarlo earned their nicknames after publicly advocating for looser regulatory restrictions around the space.
However, these agencies are limited in how broadly they can apply their oversight, and are required to apply any actions they take to their mandates as defined by law.
While Congress could help clarify how crypto is defined in the U.S., it has larger issues to address at the moment.
“Crypto is too small relative to the magnitude of other things Congress is thinking about right now,” Brooks said. “We're at a moment of a social justice inflection point in this country. We're in a moment where we have, you know, a response to a pandemic that has created a macroeconomic crisis for the country. And so the idea that Congress is going to turn its attention to this and pass legislation, that's not gonna happen anytime soon, which is proper. I mean, they have bigger fish to fry.”
Still, as new technologies – not just crypto, but fintech firms in general – are already eating into banks’ market share.
“I think what some of these fintech companies show is banks today are a little bit like the department stores of 25 years ago. There was a time…if you needed to buy hardware and clothing and you wanted to go out to lunch, you did all of that at Sears. Nobody shops like that anymore,” Brooks said. “Right now, what they want to do is go to a boutique for their clothing. They go to a special hardware store for their hardware and then they go out to lunch somewhere down the street.”
Fintech firms are the boutiques to major national banks’ department stores, he said, pointing to Stripe and SoFi as two examples.
COVID-19 crisis
Brooks declined to say if he wanted to move beyond being the acting head to become the full-time Comptroller.
“It’s up to the president,” he said.
Still, Brooks acknowledged that his past relationship with Treasury Secretary Steven Mnuchin (Brooks was a vice chairman at Mnuchin’s OneWest Bank) may have played a role in his appointment as First Deputy, and then successor to now-former Comptroller Joseph Otting (another OneWest alum).
“I can’t speak to what was in [Mnuchin’s] head, but I’ve known him for a long time and have worked with him in a variety of capacities for a long time,” Brooks said. “In my experience in [Washington], for these kinds of jobs it’s generally not about resume line items. It’s more about who you trust and whose judgement you have seen tested in a crisis.”
Brooks is taking over the OCC at a time of unprecedented financial crisis.
The U.S. entered a recession in February, the National Bureau of Economic Research announced Monday, just days after Brooks said prolonged shutdowns could harm banks.
The acting comptroller said banks were well-capitalized, to the point they would have survived the initial coronavirus crisis even without funding from the Fed and Congress.
“This is the strongest the banking system has ever been going into this crisis,” with banks maintaining deep liquidity and remaining well capitalized,” he said.
Still, “no matter how many months of a rainy day fund you have, if you run out of months, bad things happen.”