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Crypto Regulation: Who’s On First

WASHINGTON, DC – Back in February the CFA Institute Systemic Risk Council (SRC) urged congressional and regulatory action on Stablecoins. In a letter to Treasury Secretary Janet Yellen and members of the Financial Stability Oversight Council (FSOC), we urged the group to act on growing risks to U.S. financial stability posed by unregulated crypto assets, in particular the wild west of stablecoins. We noted the report by the President’s Working Group in the U.S., recommending that Congress address mounting crypto risks by passing new legislation that would address needed regulations on stablecoin products in particular. 

The SRC strongly supported the need for a prompt legislative response, but worried Congressional delays would make it necessary for other regulators and policymakers to simultaneously pursue the other routes. We proposed a two-pronged strategy that included FSOC moving quickly to designate stablecoins as systemically important payment, clearing, and settlement activities, while various FSOC member agencies, including the banking regulators, the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) would use their existing enforcement authorities to regulate stablecoins and other crypto assets where indicated. Importantly, the SRC asked that FSOC members work more collectively within the U.S. but also with global regulators to reduce fractionalized approaches to destabilizing crypto activities that can quickly and easily migrate cross border. To date, progress on these fronts remains slow.

Congress: Active, But Passive

For its part, Congress has been on a torrid, but ineffectual pace to introduce dozens of bills and resolutions covering all corners of the crypto phenomenon. From draft legislation on stablecoins, to a new securities law regime covering digital assets, legislative jaw boning has led to few changes. Since passage of the Infrastructure and Investment Jobs Act in 2021, the crypto industry recognized the potential for new laws to favor and give credibility to emerging technologies and crypto products. While nothing of note has passed congressional muster, the number of lobbyists tossing money and legislators coveting the title of crypto innovator has been fascinating political theatre.

Many of the crypto “assets” being produced are ill conceived and not ready for conventional markets. Meanwhile, regulators have generally struggled to keep up with rapidly emerging technologies that support these new products. There is a growing fear of politicians playing into the commercial interests of crypto industry players seeking limited oversight and regulation. To make matters even more challenging, the complexity of what falls under the crypto asset “umbrella” is formidable. It includes central bank digital currencies, stablecoins, thousands of individual e-tokens like bitcoin and related futures contracts and Exchange Traded Funds. There are also a growing array of private and public companies involved in the crypto infrastructure and operational space. These business “nodes” as the SEC refers to them, are the physical and virtual components that develop blockchain and other technologies and the platforms that facilitate trading, clearing and custody of crypto assets. Many of these virtual players are located offshore and can migrate, sometimes stealthily, to various jurisdictions around the globe. So far, lots of political talk but little action

The Fed: Wrong Onus

As noted, the variety of government authorities in addition to Congress that are eyeing the crypto space closely include the U.S. Federal Reserve (“Fed”). In a recent statement they alerted member banks “that prior to engaging in any crypto-asset-related activity, banks must ensure such activity is legally permissible and determine whether any filings are required under applicable federal or state laws.”

Among other things, the Fed noted that supervised banks wishing to undertake crypto-asset-related activities inform their lead supervisory point of contact before engaging. The Fed notice acknowledges the potential opportunities of the crypto sector to better serve customers but warned “… crypto-asset-related activities may also pose risks related to safety and soundness, consumer protection, and financial stability.”

Oddly, the onus is on the member bank to decide whether they have adequate risk management and internal control systems to conduct crypto-asset activities in a “safe and sound manner”. The member is also obligated to ensure such activities are consistent with all applicable laws, including applicable consumer protection statutes and regulations. This makes it sound like all necessary laws and rules are already in place and that the member bank simply needs to confirm their crypto readiness with relevant supervisors. This conflicts with the view that the needed regulations – both extensions of existing rules and a potentially redesigned set of crypto specific rules are still missing. The SRC has heard many calls for a regulatory design that addresses the novel technology risks, additional complexity of various crypto activities and can account for a highly fractionalized, 24/7 cross-border market.

Bank Regulators Receive Conflicting Signals

Last November, the FDIC and Fed released an interagency statement regarding their crypto-asset policy initiative, pledging to provide greater regulatory clarity over the year ahead. Then in early 2022, lawmakers sent a letter to the Office of the Comptroller of the Currency (OCC) directing it to coordinate more with the Fed and FDIC. 

It also directed the OCC to withdraw several interpretive letters issued since 2020 which permitted banks to engage in crypto-related activities such as offering crypto custody, holding stablecoin reserve deposits and facilitating stablecoin payments. Congress worried that the OCC letters effectively permitted banks to engage in crypto activities without proper oversight and risk management systems necessary to deal with a unique set of crypto-specific risks that “have grown more severe in recent months”.

Securities Regulators Step Up Too

Meanwhile, the Chairman of the SEC, Gary Gensler, and the Chairman of the Commodity Futures Trading Commission (CFTC), Rostin Behnam, both members of the FSOC, were on the regulatory move. In their discussions with our Systemic Risk Council, they confirmed that the task of crypto oversight is high on the list of priorities for them and all global market regulators.

Both are already using many touch points on crypto regarding regulated futures contracts, regulated ETF funds and the many publicly traded companies who are in the crypto infrastructure space. Understandably, there are various turf issues among an entire network of global regulators scrambling to address emerging products and technologies affecting cross boarder markets.

Both the SEC and CFTC are quickly moving to understand and sort out the regulatory considerations, including those pertaining to various Blockchain and other technology players key to trading, clearing and custody. These so called “nodes” are not generally covered by securities law unless they are public companies, and many include risky and unregulated lending platforms that facilitate lending /borrowing the vast universe of alt coins. 

Both agencies noted they are doing their best under current regulatory authority and enforcement powers but acknowledged there are regulatory nuances and gaps that must be addressed as crypto activities expand. Most importantly the interplay and boundaries of jurisdictional authority must be clear and collaborative among U.S. regulators.

Who’s On First?

The forgoing exemplifies the uncertain and disjointed nature of the U.S. effort around crypto oversight. It feels like the policy version of the famous Abbott and Costello bit -Who’s on First. If only it were that amusing.

As these new assets and markets continue to pick up steam, the critiques of FSOC members and Congress for moving too slowly have ramped up the timeline for action. The latest Fed guidance reiterates this new vigilance, noting they closely scrutinize crypto asset developments and supervised bank participation, given the increased systemic risks posed by crypto assets. 

Our Council has heard the crypto viewpoints and cautions many times and from many experts. One thing is certain -this new crypto world is a complicated topic for markets and regulators to digest. For its part, the investment management industry is trying to establish if and which parts of the crypto industry will become established and a part of traditional asset / investment strategies. 

Meanwhile, regulators want to encourage innovation but ensure market integrity and investor protection. Most important, regulators desperately want to avoid another moment. Finally, for investors of all sorts there is a very strong fear of missing out, given the trading volatility and remarkable gains made possible in various crypto assets. 

No matter your perspective, there must be a sense of market integrity and regulatory certainty. All players must have confidence in how various assets are structured, documented, traded, cleared and held in safe custody. To become mainstream, these markets and assets must bridge the current gap in transparency, accountability and regulatory certainty. Whether crypto refers to a theoretical CBDC, an Alt coin of mysterious value or an NFT representing ownership in digitized art, your bravery will not decide your fortune. Common sense, clear regulation and proper market structure will.

Paul Andrews is Managing Director for Research, Advocacy, & Standards for CFA Institute. Paul is also a current member of the CFA Institute Systemic Risk Council. Previously he was Secretary General of the International Organization of Securities Commissions (IOSCO), Vice President and Managing Director, International Affairs, of FINRA and Senior Managing Director, Business Operations – Europe, at Nasdaq Europe.

EDITOR’S NOTE: This article first appeared in Nasdaq on 26 September 2022.

Paul Tucker to Succeed Sheila Bair as Chair of Systemic Risk Council

WASHINGTON, D.C.—On December 8, 2015, the Systemic Risk Council named Paul Tucker as its new Chair, succeeding Sheila Bair, the Council’s founding Chair from 2012 through 2015, who has assumed the role of Chair Emeritus.

Mr. Tucker, currently a Fellow at the John F. Kennedy School of Government at Harvard University, formerly served as Deputy Governor at the Bank of England and as a member of the G20 Financial Stability Board’s Steering Group.

“The Systemic Risk Council has provided a thoughtful and constructive voice for regulatory reform in the interests of ensuring that we have a stable financial system that can serve the economy’s needs,” said Sir Paul. “I look forward to serving the Council and working with colleagues to continue the important work that Sheila and the Council have undertaken since 2012.”

Ms. Bair was the 19th Chairman of the Federal Deposit Insurance Corporation from 2006 through 2011, leading the agency during the financial crisis and the momentous regulatory reforms that followed in its wake. Ms. Bair recently assumed the office of President of Washington College in Chestertown, Maryland.

“I am proud of the Council’s contributions to regulatory reform in the United States and abroad, and there is much more to do,” said Ms. Bair. “The Council will benefit greatly from Sir Paul’s decades of experience as a respected and thoughtful economist, thought leader, and central banker.”

Paul Volcker, Former Chairman of the Federal Reserve Board and Senior Advisor to the Systemic Risk Council, said, “Under Sheila’s leadership, our Council has become a powerful voice for financial regulatory reform here in the United States. As the baton passes to Sir Paul—who is highly regarded internationally as a leading expert on these issues—I am confident that the Council’s work will have an even greater impact on the global stage.”

Notes for Editors:

The independent, non-partisan Systemic Risk Council ( was formed to monitor and encourage regulatory reform of U.S. and global capital markets, with a focus on systemic risk. The Council is funded by the CFA Institute, a global association of more than 125,000 investment professionals who put investors’ interests first and set the standard for professional excellence in finance. The statements, documents, and recommendations of the private sector, volunteer Council do not necessarily represent the views of the CFA Institute. The Council works collaboratively to seek agreement on each of its recommendations.

About Paul Tucker:

Paul Tucker was Deputy Governor at the Bank of England from 2009 through 2013. He joined the Bank in 1980 and played a major role during his tenure in many of the most significant developments in the international financial system. Mr. Tucker was a member of the Bank’s Monetary Policy Committee, Financial Policy Committee, Prudential Regulation Authority Board, and Court of Directors. He also served as a member of the G20 Financial Stability Board Steering Committee and chaired the FSB’s group on resolving large and complex banks. He was a member of the board of the Bank of International Settlements and chaired the Basel Committee on Payments and Market Infrastructure. In 2014, Mr. Tucker was granted a knighthood for his services to central banking. In addition to his role at Harvard University, he currently serves as a Director at Swiss Re, a leading global re-insurer, and was recently elected to the board of the Financial Services Volunteers Corps (FSVC).

Systemic Risk Council Letter to Chairmen of Fed and FDIC on Latest Round of Living Wills

On Tuesday, September 8, the Systemic Risk Council submitted a letter to Janet Yellen, Chairman of the Board of Governors of the Federal Reserve System, and Martin J. Gruenberg, Chairman of the Federal Deposit Insurance Corporation, commenting on the recent release of public “living will” disclosures for 12 large financial firms in accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The letter states that the Council is “encouraged” by the “updated and improved public disclosures” and that the “regulated institutions—responding to the agencies’ guidance—have considerably improved the quality of their public disclosure.”

The letter argues that public disclosure of living wills is critical to persuading the public that the “too-big-to-fail” problem has been solved and that the largest financial institutions can be resolved without recourse to taxpayer bailouts. “Although many provisions of the Dodd-Frank Act are intended to address systemic risk, the unique contribution of the living will regime—and particularly the public disclosures mandated by the agencies—is to attack directly the perception that the authorities have no choice but to bail out systemically important financial institutions in times of financial distress.”

The letter also encourages the agencies to mandate use of common definitions and reporting practices so as to facilitate comparison across systemic institutions and assist the public in evaluating the progress made by individual institutions over time.

Read the full letter here:

SRC Letter to Fed and FDIC re Living Wills 09-08-15

Systemic Risk Council Congratulates Federal Reserve Board on Finalizing the G-SIB Capital Surcharge

In response to today’s action by the Federal Reserve Board to unanimously approve its proposed “capital surcharge” on the nation’s largest financial institutions, Sheila Bair, chair of the Systemic Risk Council, issued the following statement:

“It is gratifying to see that the Governors of the Federal Reserve Board have moved ahead with final rules imposing tougher risk-based capital requirements on the nation’s largest institutions. Though the Systemic Risk Council continues to have serious concerns about the complexity of the risk-based rules, and their over-reliance on the banks’ own internal models, we applaud the Governors for imposing a surcharge up to 4.5 percent higher than the current 7 percent requirement and congratulate the Federal Reserve for holding firm against industry efforts to significantly weaken its original, proposed rule. We also note that international regulators agreed to impose a so-called ‘SIFI’ or ‘G-SIB’ surcharge on the world’s largest banks in 2010.  Yet the U.S. is the only jurisdiction to propose and finalize such a rule, which is higher than the standard contained in the 2010 international agreement. We hope the Federal Reserve will continue to work with other bank regulators to simplify the risk-based capital rules and make them less reliant on the banks’ own risk management systems. That said, this is a significant step in strengthening the current capital regime for large institutions, and we applaud the Governors for taking it.”

Systemic Risk Council Letter Supports Vitter Amendment to Increase Capital Requirements for Big Banks

On May 20, the Systemic Risk Council sent a letter to Senator David Vitter (R-LA), offering strong support for his amendment to the “Financial Regulatory Improvement Act of 2015”, which would strengthen equity capital requirements applicable to the largest financial institutions.

The letter states that the Council “has long supported stronger, simpler capital requirements for large, complex institutions, and we are gratified that you are moving forward with a proposal to do just that. There is widespread consensus that the use of excessive leverage by so-called “systemic” institutions was a key driver of the financial crisis and ensuing need for taxpayer bailouts. Though regulators have moved to strengthen bank leverage and risk-based capital standards since the crisis, the increases have been incremental and large financial institutions remain overly reliant on debt to fund themselves.”

Read the full letter below:

SRC Letter to Senator David Vitter Re Capital Requirements

Systemic Risk Council Letter to FSOC About Asset Management Products and Activities

On Wednesday, March 25, the Systemic Risk Council responded to a request for comment by the Financial Stability Oversight Council (FSOC) about asset management products and activities.

The letter states:

“We commend the FSOC for undertaking a comprehensive review of the asset management industry, consistent with its statutory responsibilities to identify and address systemic risks. We encourage the FSOC to work closely with its constituent agencies, and particularly the SEC, in addressing the systemic risks associated with asset managers. It seems clear that additional data collection is needed to understand the potential systemic risks in many areas of asset management and that further data analysis may well warrant additional regulations pertaining to leverage, liquidity, and redemption policies for high-risk funds. In other areas, such as securities lending, the risks are known and ripe for regulatory standards. In all areas, we would encourage the FSOC to work closely with the SEC in light of that agency’s considerable expertise and long experience in overseeing the asset management industry.  Finally, the FSOC should consider whether and to what extent any future regulatory-driven market developments and products (e.g., bail-in debt issued by banks) could affect the asset management industry in a manner that gives rise to additional systemic risks.”

The full letter can be found here: SRC Letter to FSOC Re Asset Management Products

Systemic Risk Council Supports Federal Reserve Board Proposal Of Capital Surcharge for Systemically Important U.S. Banks

On Monday, March 2, the Systemic Risk Council submitted a letter to the Board of Governors of the Federal Reserve System, supporting the Board’s recent proposal of a risk-based capital surcharge for U.S. bank holding companies identified as global systemically important banking organizations (G-SIBs) and calling for the proposal to be strengthened in several key areas.

The letter in part states:

“The Council believes that a well-calibrated GSIB surcharge will assist regulators and GSIBs to lean into the headwinds of systemic risk ex ante, that is, prior to the onset of periods of financial stress. This, in turn, will contribute to a reduction of the probability of catastrophic GSIB failures. . . . [T]he Council would encourage the Board to give even greater weight to a GSIB’s ‘complexity’ in calculating the surcharge. Furthermore, by explicitly incorporating into the measurement of systemic risk the additional factor of a GSIB’s reliance on short-term wholesale funding—a factor not included in the surcharge framework suggested by the Basel Committee on Banking Supervision—the Proposed Rule promises to curtail one of the key accelerants of the contagion that engulfed the global financial system during the 2008 financial crisis. . . .  Finally, by encouraging GSIBs to curtail or eliminate factors and activities contributing to their GSIB status, the GSIB surcharge is likely to reduce the moral hazard arising from the perception that GSIBs are ‘too big to fail.’”

Read the full letter below:

SRC Letter to Fed Board re GSIB Surcharge 030215

In Remembrance of The Honorable Harvey Goldschmid

The Systemic Risk Council has issued the following statement upon the passing of Harvey Goldschmid, a member of the Council:

The members and staff of the Systemic Risk Council are deeply saddened by news of the passing of our colleague, Harvey Goldschmid, a member of the Council since its formation and one of its founders.

Sheila Bair, Chair of the Council, stated:  “Harvey was dedicated throughout his career to advancing reforms in corporate governance and in protecting investors, for the benefit of all Americans.  We remember him for his numerous and valuable contributions in these fields as a public servant while General Counsel and later a Commissioner of the Securities and Exchange Commission, and as a brilliant scholar and teacher of generations of students while a professor at Columbia Law School.  His dedication to systemic risk mitigation and investor protection made him a valued member of the Council.  We will miss Harvey’s leadership in championing the mission of the Council, as well as his enduring wisdom and warm friendship.”

The example of Harvey Goldschmid as a scholar and public servant will inspire the continued efforts of the Council to provide a strong, independent voice for reforms that are necessary to protect the public from financial instability.

Systemic Risk Council Letter to Financial Stability Board About Systemically Important Banks in Resolution

On Monday, February 2, the Systemic Risk Council wrote a letter to the Financial Stability Board (FSB) about the consultative document recently issued by the FSB on the adequacy of the total loss-absorbing capacity (TLAC) of global systemically important banks (G-SIBs) in resolution.

The letter states:

“The Council has consistently supported requirements for G-SIBs to maintain robust levels of high-quality capital, whether in the United States or overseas. We have also supported efforts to strengthen the mechanisms available for the resolution or orderly liquidation of large, complex financial institutions should the need arise, pursuant to Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act in the United States and comparable resolution regimes elsewhere. We commend the FSB for its attention to addressing the causes of financial instability and developing effective methods to combat the perception that certain large, complex financial institutions are ‘too big to fail.'”

Read the full letter below:

SRC TLAC Comment Letter to FSB 020215


New Paper Finds Little Progress in Reducing the Complexity of Global Systemically Important Banks

Today, the Systemic Risk Council* released a research paper by Richard Herring and Jacopo Carmassi examining the complexity of the 29 institutions that have been designated as Global Systemically Important Banks (G-SIBs) by the Financial Stability Board in November 2013.

Links to the full paper and executive summary are below.

The authors found that in 2013 G-SIBs had:

  • an average of $1.587 trillion in assets (with a high of $3.100)
  • an average of 1,002 majority-owned subsidiaries (with a high of 2,460), with nearly half the subsidiaries classified as non-financial
  • 2.6 times more subsidiaries than non-financial institutions with comparable market capitalizations
  • 60% of subsidiaries located outside the headquarters country (high of 95%)
  • at least one subsidiary in 44 different countries (a high of 95)
  • 12% of subsidiaries located in off-shore centers (with a high of 28%)

“The complex structure and opaque connections among G-SIBs impeded oversight and market discipline before the crisis and greatly complicated management and resolution after the crisis”, said Richard Herring.  “To enhance market discipline and ensure the credibility of plans to resolve G-SIBs without resort to taxpayer bailouts, greater progress is needed to simplify and rationalize G-SIBs’ organizational structures and improve transparency and market understanding of those structures.”

The paper also includes several recommendations to regulators and banks including:

  • The use of consistent definitions and terminology in bank disclosures of organizational structure, including such key terms as “material entity.”  The paper found that basic information can vary widely depending on reporting venue. For instance, Federal Reserve Reports show that in 2013 Citigroup had 1,883 subsidiaries, while Citi’s 10-K filing with the SEC shows 184 subsidiaries;
  • Public disclosure of information on organizational structure in readily searchable formats;
  • Disclosure of key elements of living wills to enable the market to better evaluate their credibility;
  • Reconsideration of tax and regulatory policies with an emphasis on how they impact organizational complexity and impede orderly resolution.

Download the full paper below:

Carmassi Herring Corporate Structures Transparency and Resolvability of G-SIBs Paper

Download an executive summary below:

Executive Summary of Carmassi Herring Corporate Structures Paper

*Support for this paper was provided by the Systemic Risk Council, an independent and non-partisan council formed to monitor and encourage regulatory reform of US capital markets focused on systemic risk. The views expressed in the paper are those of the authors and do not necessarily reflect the views of the Systemic Risk Council, its members, or its supporting organizations.

Richard J. Herring is Jacob Safra Professor of International Banking and Professor of Finance at The Wharton School, University of Pennsylvania, where he is also founding director of the Wharton Financial Institutions Center. 

Jacopo Carmassi is a research fellow at the LUISS Guido Carli University in Rome, Italy, and a research fellow of the Wharton Financial Institutions Center, University of Pennsylvania.