On June 13, 2022, former acting Comptroller of the Currency Brian Brooks and law professor Saule Omarova participated in a panel hosted by the National Community Reinvestment Coalition (NCRC) titled “Discerning a Regulatory Approach to Crypto Currencies and Digital Assets.” Given the panelists, I thought this would be an enlightening conversation. Brian Brooks is a capable and insightful proponent of pro-innovation crypto regulation, and Professor Omarova is a well-respected progressive financial scholar. In particular, it seemed like a useful opportunity to hear an unadulterated, progressive perspective on crypto regulation (i.e., as opposed to political speech from politicians such as Senator Warren).
I was not disappointed. The conversation was a healthy, deep exploration of differing worldviews and policy conclusions. For me, it helped illuminate some of the areas where there are fundamental philosophical differences between traditional pro-crypto types and “anti-crypto” progressives. But more importantly, there seem to be areas in which common ground can likely be found.
My summary/notes from the conversation are below. These notes are tailored for a reader familiar with crypto and financial services policy. While I am certainly biased in favor of Mr. Brooks’ views on most crypto policy, I have done my best to document Professor Omarova’s views in good faith. Please keep in mind that these are written notes of a live conversation. In every instance, I’ve recorded the time stamp of the beginning of each speaker’s segment (relative to the NCRC recording) so that you can listen to his or her views yourself, in context.
These are my independent thoughts and do not necessarily represent the views of my employer.
Omarova (16:44)
The narratives of crypto proponents do not always match reality.
There’s a difference between using technology in finance and changing money itself.
“Money is a political instrument. It’s not just an economic resource.”
Whoever controls money affects people’s lives.
If we “decentralize” control of money, we lose control of it.
Crypto proponents rightly criticize the fact that the use of money today is divorced from the needs of everyday people. I agree. However, I don’t see any evidence that replacing traditional money with crypto money will get us to a better solution.
For example, the price of bitcoin has appreciated greatly over the past 13 years. Did that improve financial inclusion? No.
Cryptography as a technology can’t solve financial inclusion. If it could, crypto would have made gains toward solving financial inclusion by now.
Financial inclusion is a complex, socioeconomic, political matter. It doesn’t have to do with the nature of the US dollar vs. bitcoin but rather the fact that, e.g., people don’t have jobs.
What does crypto do that channels greater amounts of real money & real jobs into the economy?
I haven’t seen much evidence that it does so. Rather, most crypto is used for trading.
What money is used for is not a function of technology per se. Instead, it’s a function of who runs the system, what it is set up for, what the goals of the administrators are, etc.
I would be happy to use the technology in ways that preserve the public’s say in how money is used to raise the real economy.
Brooks (22:51)
I agree with 90% of what Saule said.
Points to make:
The project of crypto isn’t to replace money. It’s to replace banks. Crypto tokens reward users for creating a decentralized financial institution. I sat on the credit committee of a much-reviled bank. People can make mistakes.
On financial inclusion, the rate of black ownership is 50% higher than that of white ownership. Over the last five years, bitcoin has outperformed the S&P by a factor of 5x. (Bitcoin owners) were minority investors who weren’t around to use inherited wealth to take advantage of the IPO boom of the 80s. In 2009, when an asset was available at 0, black people were there and could take advantage of it.
Omarova (25:45)
Discrepancy in ownership showcases desperation (pointing out flaws in existing system). The discrepancy alone does not imply that minorities will benefit from price appreciation. For example, I bet minority borrowers owned a lot of subprime mortgages.
I remember how subprime lenders told a heart-warming story of how an African-American single mother could afford a house.
Inclusion can stand for predation.
The takeaway from discrepancy in ownership should be limited access to financial services for minorities, not the salvation potential of crypto.
Indeed, most crypto investors are affluent white males.
Brooks (28:20)
We have a lot of rules about participation (like accredited investor rule) under the guise of protecting people. If the rule is “only rich people can invest in x,” well rich people aren’t stupid. Excluding people from wealth creation opportunities seems unfair to me.
Omarova (30:00)
I don’t disagree; we shouldn’t exclude people from investments. However, cryptocurrencies are not simply investments. They’re also used as money and come with a payment system embedded. They are very complex financial instruments. We’ve never had that kind of instrument before.
I understand that crypto intends to replace banking. It wants to sit on top of the US dollar without being controlled by the issuer of the US dollar. Banks are basically the agents of the federal government: the government charters a bank and gives the bank the exclusive right to issue private money that is equal to sovereign money. Crypto tries to replace that. Therefore, our question should be the same — can we, as the sovereign public, control those private issuers of private money? Private issuers of money ought not abuse their power like banks are doing right now. Private firms legitimately pursue profit, but money is not a private resource, it is a public resource.
Question from NCRC’s Adam Rust: How do you think stablecoins should be regulated?
Brooks (34:15)
Should be fully reserved, redeemable on demand, and with public audits.
If you meet those conditions, you’re the same as a traveler’s check. Like traveler’s checks, such stablecoins wouldn’t threaten stability. They are a utility that solves for many problems.
There are things that people call stablecoins that are not like the stablecoins I’ve described.
Banks have to interact with stablecoins. I think non-bank issuance is fine. No one worries that, e.g., Bed Bath and Beyond gift cards are not issued by banks.
People say “stablecoins should be issued by banks,” but there are bank charters pending from non-bank stablecoin issuers that are not going to be granted.
More of these issuers should be inside the banking system for all of the reasons you’d think.
Omarova (38:40)
I haven’t made up my mind about stablecoins. Ultimately, I don’t understand the point.
In a way, banks already issue stablecoins. They are electronic, and they’re stable. So why do we need stablecoins on top of bank deposits?
Stablecoins, like casino chips, offer convenience in a narrow ecosystem, but they don’t seem useful more broadly. They are used as trading collateral and as a safe asset in crypto markets (but that’s it).
Do we need banks to be issuing stablecoins for this purpose? It doesn’t seem worth the energy.
But like I said, I am still thinking about these issues.
Brooks (41:50)
In a market economy, who decides the answer about what public benefit there is?
There’s demonstrated demand for stablecoins.
We used to think intranet email was the only good thing, but now we understand internet email is so much better.
You all have Zelle or Venmo. I can’t Zelle all of you $$; I can send you stablecoins. It’s a traveler’s check over the internet.
Omarova (44:45)
Fully interoperable, instant digital money would be great. Best form of that would be such money, publicly-issued.
If privately issued, there could be 1000 different issuers, fragmenting the payments system.
The banking system aligned different financial institution obligations (X bank deposit vs. Y bank deposit) to combat fragmentation.
Brooks (46:38)
Stablecoins aren’t money; they merely transmit dollars.
Different versions of traveler’s checks were good because they met different market demands.
Omarova (48:20)
Stablecoin issuers wish to create money, just like banks. When a financial institution creates money, it is a monetary institution like a bank and must fulfill similar regulatory obligations.
Adam Rust: Insured depository institutions (IDIs) must comply with the CRA because they get insurance. How would CRA work for an IDI issuing a stablecoin?
Brooks (49:40)
CRA is a bargain. IDIs get special benefits and therefore it’s thought to be just that they give back to their community. In particular, if you raise low-cost deposits from a community, you ought to put the money back into that community. If you’re taking deposits at an artificially low rate, you have a CRA obligation.
If one of the things that stablecoins do is increase the amount of bank deposits and increase money velocity, then pro-community reinvestment types should support those activities of stablecoins. If stablecoins increase demand for and utility of dollars, that’s good.
If someone has an option to put dollars into a bank account or into the stock market, it’s better for community reinvestment if those dollars go into a bank account because the dollars must be reinvested.
Additionally, if you believe stablecoin issuers should be banks, you need to grant bank charters to stablecoin issuers. A stablecoin issuer like Circle does not have a CRA obligation. Its asset custodians may, but Circle does not.
Omarova (52:15)
First, these are the reasons why people believe stablecoins should be limited to banks:
Stability from supervision & FDIC insurance
Keeps Big Tech from issuing a stablecoin because commercial activity is not allowed by banks. No “Amazon Coin” that can cannibalize the USD.
But stablecoin issuers’ activities are not just bank-like. Also similar to an MMMF. Also similar to a central bank inside the crypto ecosystem. Do we want to promote a lot of mini-central banks? Do we have a regulatory approach ready for that?
So the shift between trad money and stablecoins is pretty big, and we don’t have all the answers yet. Until we’re sure, I’m hesitant to condone FDIC insurance behind stablecoin issuers. Maybe I’ll change my mind in the future.
Brooks (57:50)
Even pure-financial companies — not just commercial companies — can’t get OCC charters.
Also, you made the point that we have a bunch of different monies — airline miles, Amazon coin, etc. This is a point on crypto generally: We all have a bunch of different “stranded monies.” We should be able to monetize all of those different monies. One of the projects of crypto is to monetize everything and make it fungible. You created value with your efforts, and you should be able to benefit.
Omarova (59:50)
Not every stranded value should be commodified/needs to be commodified. It’s also not clear that value of our labor always accrues to us (e.g., using Big Tech platforms)
Also, private money challenges sovereign money when there is market power behind the private money, e.g., Amazon coin.
I’m with you about the crypto utopia so long as the market power of the crypto issuers is not growing to the level of a political economy issue.
Keep it private but don’t provide FDIC insurance.
Ultimately: do we want to make it stable and safe (with FDIC insurance)? For me, as I said, the “why” is still missing. I’m not sure.
Adam Rust: CBDC good?
Omarova (1:02:30)
If you take seriously Brian’s arguments about why crypto is better (i.e. email vs snail mail) then CBDC is a good compromise. Public money + great tech. Ensuring inclusion that no private entity can ensure — the public can pursue collective interest even if it’s unprofitable.
Devil is always in the details. Design can differ tremendously.
Brooks (1:06:45)
There are three possible frameworks for financial services:
Lots of gov control
Bank intermediation (what we have today)
Lots of user control
Lots of gov control has problems because of what is happening in China. China has articulated three policy goals: 1) Disintermediate US dollars & require eCNY payments. 2) Get away from US-controlled financial system. 3) Make determinations about settlement, like Canadian truckers.Interesting tidbit: Brooks says a top-2 bank CEO told him as comptroller they were going to prevent users from using cards to buy guns in the wake of Sandy Hook, but Brooks told him he shouldn’t do that.
We all don’t like the bank-controlled system. Do you want user control or government control?
Omarova (1:12:00)
Governments are not the only ones who can have power that limits choice. Market power also limits choice, sometimes as much as governments.
The Fed already processes payments, but we don’t see abuse. We don’t worry about government control in the USA. We’re not China.
CBDC is about providing public services, not about control.
Audience question: Given the size of national debt, “how stable is the US dollar?”
Brooks (1:15:30)
I would argue we haven’t done things like Canada & the truckers because we have checks against things like that. When we build capabilities that allow that control, we will use those powers.
Eventually, it will happen — and then for the rest of your life.
Audience question: First, we control what poor people do all the time, i.e. how they use food stamps, for example. Separately, my question is: how do you reconcile the idea that crypto replaces banks but you want crypto firms in the banking system?
Brooks (1:18:30)
I don’t think every bank has to carry out all of the functions of a bank. Technology allows financial institutions to unbundle services.
I don’t think it’s a contradiction because I don’t think the banking system will be the same in 50 years.
All of our systems — supervision, risk management — must change.
Audience question: (inaudible). Second, what do you think about Lummis-Gillibrand?
Omarova (1:21:20)
Crypto seemed to like L-G because it didn’t seem too onerous.
Fundamentally, I object to L-G because I don’t believe the crypto system is precisely the same as the traditional system. If it’s the same, sure, we can take the old system and use it for the new system. However, I think there’s a fundamental shift. It’s very difficult to take a crypto-asset and put it into a traditional “box” of financial products. That’s my hesitation.
Brooks (1:24:45)
Any framework is better than no framework at all.
I disagree we need a crypto-specific framework. “Crypto” covers a lot. L-G is imperfect, but it’s a good discussion. Some crypto tokens look like things we already know about so let’s get started there.
(End of conversation.)
