Event: Two Sides of the American Coin: Innovation & Regulation of Digital Assets
Hosted by Digital Chamber, 1 October 2020
Panelists:
Jay Clayton, Chairman of the U.S. Securities and Exchange Commission (SEC)
Brian Brooks, Acting Comptroller of the Currency (OCC)
Moderator: Jackson Mueller, Director, Policy & Government Relations at Securrency
Moderator:Two sides of the American Coin, a focus on innovation andregulation of digital assets. I think it goes without saying thatyou guys have been quite busy over the last week between the two ofyou, if not the last couple of weeks and months in this space.
So I really wantedto focus on a number of areas for this discussion today. The firstbeing, talking about innovation under a mature regulatory framework.And I think listening to a number of your presentations and commentsin the past, that there’s a recurring theme in both of yourapproaches to innovations in the digital asset space.
And that is thatinnovation can flourish while still complying with our respectiveregulatory frameworks. Now, Mr. Clayton, I’ve got about ten pages ofstatements from you since you became chairman of the SEC that reallyreflect that theme. And Mr. Brooks, you’ve been quoted quite a bit inrecent weeks, and you’ve also been consistent in this messaging sincereally joining the OCC.
So a two partquestion to this larger question. Are our current frameworkssufficient to address new innovations and future developments in thisspace? And then are there particular areas of our current frameworkthat are problematic for you? And that could potentially requirelegislative efforts to address in order to spur innovation forward.
So Mr. Claytom, letme start with you. And then Mr. Brooks can piggyback on top.
Jay Clayton, SEC: Sure. Thankyou, Jackson. And the short answer is, yes. Our regulatoryframework, the principles of our framework, it’s time tested and it’sbeen time tested through many innovations.
You know forexample, if you talk about trading today, all trading is electronic.Our exchanges have gone electronic. Every trade you do, if you callyour broker and say, I want this, it gets routed through anelectronic, an algorithm executed electronically. That was not thecase 20 years ago. It may very well be the case that just as you hadstock certificates and now you have entries, digital entries forrepresenting stock. It may very well be the case that those allbecome tokenized.
But you have to staytrue to the principles, which is people who are distributing stock,people who are insiders of the companies for which the stock has beenissued, they have responsibilities. One of the problems that we hadwas we got off on the wrong foot in this innovation. There was thetheory that, because it was so efficient, because it could have somuch promise, we could toss aside some of those principles ofresponsibility and transparency. I think now three years later, fouryears later, we are in a much better spot.
And we’re seeing thepromise of blockchain technology, distributed LEDGER technology, bring efficiencies to that, what I say is time-tested framework.
And with that, letme turn it over to Brian.
BrianBrooks, OCC: First of all. Thanks Jackson for having usboth here. I think the fact that you’ve got the OCC and the SECsitting in the same room, talking about this tells you a lot aboutthe maturation of what’s going on here.
And I honestlycouldn’t be more excited about the partnership between our twoagencies in terms of not only seeing these issues as enforcementissues, but trying to also show the other side of the coin. That’sthe title of today’s talk, right? There are some things out therethat have been sold in ways that I think are problematic undersecurities laws and other rules.
And there are alsosome things here that would be good for America to invest in and leadin. Right. And I think we have to show what we think is good andsafe, and we need to lean into those things in the same way that weenforce the things that we think are problematic and have disclosureissues.
And that’s, I thinkwhat we’re trying to do together.
I think from theOCC’s perspective, I think a lot of the maturation of the cryptoindustry is about thinking about what this stuff is about. Right. AndI think that anybody who’s worked in the field knows that theoriginal concept of Bitcoin and all of these other innovations wasnot supposed to be to create some made up investment asset.
God knows there areplenty of things to invest in, right? Plenty of derivatives contractsand equities, and other ways of accessing volatility. If that’s whatyou’re looking for, you don’t need to make up something on a computercode to invest in, if that’s what you’re trying to do.
We think what’sgoing at the OCC is something more fundamental than that. And it maybe challenging to the existing bank regulations, which is why we needto clarify them. But what we think is going on is the idea thatnetworks are fundamentally more resilient and efficient thanvertically integrated sort of control towers.
And historically theway that financial intermediation happened in this country was thatyou had these central control functions administered by banks as theunderpinning of all of finance. There were basically single points offailure. And if a bank went down, really bad things happened, right?
We saw that in thefinancial crisis. All it took was one Lehman Brothers and the end ofthe world as we knew it arose. Same thing if a bank data center getstaken out in a hack. That bank may be unavailable for days, creatingchaos in markets. Networks don’t behave that way. And what cryptotokens are fundamentally about is they’re supposed to be the assetsthat are powering networks.
They’re the thingsthat are incentivizing people to connect to the networks, such thatthe functionality of the network, like the internet becomes verystable and resilient over time. So we see this as more of aninfrastructure issue than an investment asset issue in its maturity.And the reason I think that people have seen what they’ve seen fromthe regulatory agencies is that we haven’t achieved maturity yet.
And so in the earlydays you have speculators, right? And you have people trying to takeadvantage of speculators. But in the mature phase, what you have is aradical new payment system that may be better than existing paymentsystems, which are built on antiquated technologies.
And since the OCC isin part, the administrator of the banks that operate on paymentsystems, we have a strong interest in trying to envision a mediumterm future, not a tomorrow future, where people are speculating onBitcoin price movements. But a medium term future where theseblockchain networks that have been built are basically the internetof finance.
That’s where I thinkthis goes. And that’s kind of a mindblowing challenge to the bankingmodel.
And so I think ourresponsibility as regulators on the bank side is to get out front ofthat and help chart a course that shows that there is a future forbanks in this world. That banks play a critical role in this world,and we need to establish a framework around it so the ways theyconnect are safe and sound.
Moderator:Thanks guys. Going back to both Brian and Jay’s comments.Brian you’d mentioned, we haven’t achieved maturity yet in some ofthese areas in this space. And then Jay, you mentioned getting offon the wrong foot on some of this innovation.
And I think thatgoes to my second question of whether and to what extent is thecontinued discussions in particular among your agencies as it relatesto what is and is not a security. And if you go broader than that,crypto-assets taxonomy. Has the focus on those issues in particularreally prevented you from addressing other potentially lesscontroversial developments in the blockchain and digital assetsspace? Such as, for instance, tokenized versions of traditionalregulated financial instruments. Jay, I’ll start with you and thenBrian, if you want to go as well.
JayClayton, SEC: Sure. And it’s a very good question to askbecause you read about the problems. But we’ve got a lot of peopleworking on areas that aren’t problematic. Areas where we’re bringingthis technology to bear. And, and also, I think you can characterizea number of our recent discussions that we’ve had with the OCC aswhere can we be clear that it’s not a securities law issue?
That’s a lot of whatBrian and I, and thanks to our great staffs have been talking aboutover the past few months. And how do we in the payment area, thematuration in the payment area, how do we make it clear to peoplethat if you’re not trying to finance your network, you’re not tryingto re give people a return on your network, it’s probably not asecurity.
But if what you’retrying to do is finance the build out of your network with yourtoken, or provide people with a return for using the network withyour token. You look at the traditional test of security: it’s prettyclear it’s a security.
And we’re working tomake it clear where those lines are, so people can mature the paymentsystem. And I think, I don’t know Brian, is that a fair way todescribe our relationship?
BrianBrooks, OCC: Yeah, I think that’s exactly right. I mean,look, the collaboration we had just start with stablecoins, which isthe first thing that we’ve done together.
I think came out ofa view that look, Jay is not the security silo. And I am the lendingand deposit silo. We’re part of a group of regulators in thegovernment who are charged with maintaining a strong, robustfinancial infrastructure for the country. Right. We oversee thefinancial system.
And there aredifferent ways people access capital and credit in the financialsystem. Sometimes they choose to take a bank loan. Other times theyissue a debt security. It’s fundamentally a fungible thing. Sometimespeople buy an equity. Sometimes they do something else. And I thinkwe came together around this. Based on the view that the countrywould be a stronger economy with less friction if our payment systemworked better.
And one of thethings that can potentially help innovate the payment system and makeus more internationally competitive would be leaning into stablecoinpowered blockchains. So, Jay and I spent some time talking togetherand said, hey, on this issue, we have a strong alliance of interestswhere we both want to see American leadership. We both want to see apayments network that is as strong as China’s or the EU’s. And oneway to do that is for us to say that banks have the authority toparticipate in these payment networks. And for the SEC to say, hey,stablecoins that meet certain conditions outlined in the OCC’sletters, they will not be securities.
So come to us andwe’ll give you clarity. That’s a great way, I think, for governmentto do what it does best. Which is to provide framework rules withinwhich industry can innovate and flourish.
Moderator:That’s great. And thank you for that. And I think thisidea coordination is an interesting one, especially when the industryis converging. When you think of the different types of payments andmethods for transacting out there, and in particular I just wantedto quickly go over another one of my questions.
Mr. Clayton, youtalked about in the recent Senate Banking Committee hearing. Youstated that the announcement of Libra was a focal point forregulators of different types to recognize that digitization and thedigitization of the plumbing and other aspects of our financialsystem, including payments transfers is coming.
And that was quoteunquote. I think for the two of you, when you think about bridgingtraditional investment assets as payments. When you think about thelaunch of Libra, MasterCard launching a CBDC testing platform, PayPaloffering direct sales of cryptocurrency, the OCC recently awarding acharter to I believe it’s pronounced Jiko Bank that deals withtreasury bills in particular for payments.
And then you thinkabout the recent charter of Kraken, I believe that was in Wyoming.And even with the interaction between the Digital Dollar, stablecoinsand other digital assets. Are we at a point where industryconvergence is really going to drive and necessitate greaterregulatory convergence in the future?
And Brian, let mestart with you. And then Jay.
BrianBrooks, OCC: I would start with this comment, which iswhen you give that long laundry list of things, I’m reminded of thefact that in the early days of the internet, there was this massiveflourishing of internet businesses, most of which failed.
And that’s okay. Youknow what I mean? My guess is that most cryptocurrency projects aregoing to fail. They’re not going to be relevant to a particular need,or they’re going to raise fundamental, legal compliance issues orsomething like that. I don’t think it’s our role as regulators to saythat all of the things you just mentioned are good or all of them arebad.
I think, I mean,coming back to Jay’s point about principles, I think it’s about sortof articulating a framework much as the EU recently issued aframeworkon stablecoins just a week ago, to sort of say: things that meetthese parameters are legal to bring before the market. And then themarket can decide what it wants.
Things that areoutside of this framework, raise real problems of investor disclosureor fraud or whatever, and probably shouldn’t come before that. Butwithin that framework, lots of legal things are going to come to themarket and fail. Just sort of like lots of companies that list on theNew York Stock Exchange and were there 70 years ago have gone out ofbusiness. And again, we’re okay in a dynamic economy.
What I try to saywhen I talk to people about crypto is, every one of these tokensrepresents a different project with a different point. Some of themwere fundraising schemes. You know, that raised the issues that theSEC has identified. Some of them are trying to build a network forthe purpose of using the token to add access to the network.
And they’re assimple as utilities. And some of them are foundational technologiesthat our future banking system could be built on. So I don’t want topick winners and losers here, but what I do think we need to do asregulators is articulate what we think blockchain adds to theecosystem. And where the risks are and where the benefits are.
And where there arebenefits we should not be stupid and get in the way of Americansuccess and competitiveness. And where there are issues of scams andfrauds and other things, we shouldn’t be shy about saying so. And Ithink that’s what we’re trying to do today. Is to say, here are somerules.
Let me just give youone example. And I don’t mean to go on this long, but like the firstthing the OCC did on crypto was come out with a custody interpretiveletter to say that, hey, in the same way that banks are authorized tocustody things like digital securities, or any other exotic asset,you know, vintage cars, for example, they can custody these things,subject to their normal risk management practices. And the pointthere was, one of the big risks in crypto is that somebody is goingto steal your code and you’re going to get robbed, more or less. Wecan help with that.
Another thing we didis we came out with a stablecoinletter, authorizing banks to maintain the deposit accounts thatback these stablecoin projects. And that’s important because somestablecoin projects have blown up because of what amount to bankruns. You know, people thought they bought something that wasredeemable for currency. And when they went to redeem it, there wasno money in the bank. And that’s a problem.
So I think these arekind of the OCC equivalents to things that the SEC cares about interms of somebody’s buying a piece of the blue sky. You know, theremay not actually be a business there. And that’s what disclosureobligations and registration obligations are about.
But I do think thatonce you establish these rules, for example, when we came out andsaid, you have to comply with collateral and audit standards. When weput those rules out there, the weird thing was is that the marketcirculation of US-based stablecoins went through through the roofbecause markets like rules.
They like clarity,interestingly. And I think we can have a lot of innovation once wespecify what the rules are. So I think coming together as you know,joint regulators and specifying that, is going to be a good thingultimately for the projects that are valuable.
Moderator:Jay. I’ll let you answer that question, but I think Iwanted to add a little bit more to it.
You know, Brian hadmentioned the need to push forward on a framework for a lot of theseissues and frankly you know, for me, one of my recurring nightmaresin this space is reading a 2016 government accountability officereport. That on page three gave a chart of all the overlappingregulatory jurisdictions in the U.S. At the federal and then thestate level as well.
So when you thinkabout that overlap as you answer my first question. How do you knowwho’s going to drive this at the end of the day, right? Because itseems like as the industry converges on a number of these areas,you’re going to need regulators to band together and have a unitedvoice on this.
So who drives?
JayClayton, SEC: Let me first say I enjoyed Brian’scharacterization of where we are and where we’re trying to go. Ithought it was quite good.
And, and who drivesdepends on the functionality. Okay. So we’re talking aboutstablecoins as an area for enhancing efficiencies in the paymentsystem.
Well, the people whoregulate the payment system, the banking regulators, they shoulddrive this. If you’re talking about – in the preamble there wastokenization of ETFs – well we should drive that and we’re willing todrive that. Our door is wide open. If you want to show how to tokenize the ETF product in a way that adds efficiency, we want tomeet with you, we want to facilitate that.
Of course, you’vegot to register it and do what you would do with any other ETF. Whatwe don’t like. What we don’t like is when someone says, you know, thefunction is payments, so you really gotta look past the securitieslaw stuff.
I can’t do that. Youknow, I wouldn’t be doing my job. But as you focus in on thefunction, we’re coordinating around that and that’s exactly what wewere doing with our statement in reaction to the stablecoin letter.Which is these guys (OCC) are gonnatake the lead on that. Come tell us about it.
Don’t pretend thatit’s a payment system when it’s actually a financing vehicle. Butwe’ll kick the tires and we’ll give you our view. And then go overand see Mr. Brooks and his colleagues.
Moderator:Do you guys think at least from an internationalperspective, when you talk about the coordination and agencycoordination here in the U.S. And just the complex system that wehave currently. Is that a competitive disadvantage here? I mean, whenyou look at what the EU proposed last week, and I admit I haven’tread through 170 pages yet of their crypto-asset report. When youlook at some of the select countries out there that are movingforward on, whether it be CBDCs and their central banks are pushingforward on that.
When you look atwhat China is doing with their blockchain services network. And thepromotion of that and interconnectedness with various public ledgersout there. Given all of what’s happening internationally, does thefragmented system that we’re in, does that put us at a competitivedisadvantage at the end of the day? Because we just can’t respond asquickly as some of these other countries can.
JayClayton, SEC: So I’m going to jump in on that and sayevery situation is different. And we’re not out of the COVID woodsyet. But if you look at the response of the various U.S. Regulatorsaround the COVID pandemic, the ability to coordinate, but also theability to be expert in each of their areas, came to the fore.
And so I think it’sa system that’s actually well-tailored for the complexity and variousfunctionalities of our financial ecosystem. And look, I think we’refairly early days in blockchain technology. I’m sure it’sfrustrating. But if you use the old cliche – history doesn’t repeatitself, but it rhymes – go back to the digitization of trading.
You had Island, ICE,all these things and many others that all demonstrated that therewere efficiencies to be garnered. They worked through the regulatorysystem. In fact, many of the same issues were coming up. And now wehave a modern trading environment where spreads are tighter,liquidity is greater and the like. And the same thing is probablyhappening in the fixed income market.
And let me just saythis, I’m not worried about, you can call it fragmented, you can callit overlapping, you can call it patchwork, you can call it themultifaceted, whatever word you want to use.
And I also wouldn’tspend a lot of time worrying because I don’t see it changing. So as apragmatic matter, you know, you probably would just want to make itwork as best you can. I don’t know, Brian.
BrianBrooks, OCC: Yeah. I agree with all that. So let me justextend those remarks and say, first of all, the U.S. system may befragmented in the sense that we have more regulators dealing withfinance that some other countries do, but you’d be surprised howclosely coordinated we all are.
There are variousvehicles by which we all sit together and do make policy judgments.We have the Financial Stability Oversight Council (FSOC) that just met last week and discusses important issuestogether. We have the President’s Working Group on Financial Markets.This is looking at crypto among other things.
And so you’ll get acoordinated response out of us, I think better than most peopleappreciate. But what I would tell you is. The most important strengthwe have in this country, which a lot of these countries that haveunified regulation don’t have, as well as we do, is we have a strongphilosophy that markets rule in this country, you know, and our roleis not to command and control the economy.
Our role is tocreate frameworks within which markets can function. And so I’ve saidover and over again, that the most important reason I’m trying toaddress crypto at the OCC is not because I have a bias in favor ofcrypto. It’s because there are 50 million people who own this stuff.And so it’s important for Jay to make sure that what they’re buyingis real and disclosed and registered and all that stuff.
It’s important forme to recognize that this stuff sits inside the banking system today,and we need some rules around it. But at the end of the day, thething that is America’s strength and the reason that we are the mostinnovative country in the world is precisely because we let marketsdecide.
To my point aboutthe New York Stock Exchange companies going bankrupt. The New YorkStock Exchange does not refuse to list a company because they thinkthe product is crumby, right? They let the market decide if theproduct’s good or not. They just have a set of rules about disclosingwhat that thing is.
And that’s whatwe’re trying to do. At least what I’m trying to do today is to letmarkets decide what they want. And then we’ll decide what’s legal tomaximize the ability of market actors to make their decisions.
JayClayton, SEC: And let me just say. I think we both willlet the market decide, but we both recognize that there areefficiencies that can be added to the market. But there always are.
That’s the beauty ofthis. And I am sure I have no doubt. One of the things that comes tomind is security interests. Security interests are incredibly paperintensive. Anytime there’s a refinancing, the filings that have to goyou know, around the States and whatnot. And any of the leveragedfinance lawyers on the phone know this area where digitization couldadd a tremendous amount of efficiency. Without a doubt.
Moderator:Let me just add in another related question, as it relatesto some of these international developments we’re seeing. And youtalk about markets driven and like here in the U.S. But to whatextent when you see these developments, whether it’d be out of China,Europe, elsewhere, as it relates to expansion of their paymentsstructures, or creation of monolithic centralized systems. Does thatpose a threat to the promotion of our financial services abroad andthe values that we hold in the U.S. and export abroad.
BrianBrooks, OCC: So maybe if I can jump on that because Ithink you’re really talking about the development of things like theChina, e-Renminbior the EU / ECB work around stablecoins, or the UK statement aboutcentral bank digital currency. Here’s what I think. And I’m going tocome back to my market point. Countries like China, have an abilitythat we don’t have.
Which is they have acommand and control economy and a single party, you know, sort ofgovernment. And if they want to dictate that we’re going to have thiskind of a currency, they can do that tomorrow. And we can’t do that.Right. Because we’re a democracy and everything else. So that’s nevergoing to be our strength.
Our strength is, asI’ve said in multiple other fora, we’ve already built a bunch of realtime payment systems. It just wasn’t the government that did itbecause that’s the magic of America. We’re the people who willdeliver you eight different flavors. When the Soviet union woulddeliver you one.
And so the questionI’ve got is just what can we do as regulators to create a safe andsound environment where our private sector can be unleashed becausewe’re better than they are when we do that. And I think the problemwe’ve had for the last 20 years or so is we haven’t given clarity tothe market about which of these things we think are legal and not.
And that’s whatwe’re trying to start doing now. Is to say, yes, we’ve seen someprojects that we think are legally problematic. Jay’s brought somelawsuits to highlight what those look like. Now we’re trying to lookat the other side of the coin. Here are some things that we think arehighly valuable and we’re okay with.
And so we start withthe easy, low hanging fruit of stablecoin powered payment systems, aslong as they are compliant with BSA/AML requirements, as long asthey’re based in the U S and fully collateralized with Fiat currency,we’re more or less good with that. And if that’s the standard, we’vealready beat China because we’ve got a bunch of those networks, notjust their one.
That’s ouradvantage. It’s markets.
Moderator:Let me go back to my previous questions on kind ofcoordination and agency coordination. So I’ve got both of you in thisroom right now from the SEC and the OCC and I think everyone that’slistening in and myself listening in from a couple of feet away,really appreciates the two agencies recognizing the potential foroverlap of authority.
You know, the factthat you’re able to work together to work out some of the kinkswithin this system that we have. And which is not going away.
I guess the questionI have for the both of you since you’ve been very active over thelast a week in particular, giving me a lot of weekend homeworkreading. But even before that is, do you see more cooperation aheadbetween your two agencies and how do you see U.S. regulators movingforward on a more coordinated approach.
Does it have to beat kind of FSOC level in addressing some of these issues. Or as youguys mentioned, it can be an agency by agency basis as well. Jay letme start with you. And then Brian.
JayClayton, SEC: Sure. I think you outlined the answer. Whichis in some cases it’s bilateral. We’ve done a lot of bilateral workand that bilateral work we’ll feed into work at the PresidentialWorking Group or at the FSOC or otherwise. There’s no set structurefor coordination. We have a lot of structures that facilitatecoordination, but as things come up …
Chairman Tarbertover at the CFTC and I, we have a standing call every Monday. Somedays it’s a half hour, some days it’s ten minutes. Where are we goingto be better if we resolve things at that level quickly? So there’s alot more coordination than you see. We certainly don’t like announceevery time we talk to each other. That would be quite cumbersome. Butthere’s a lot of discussion.
BrianBrooks, OCC: Yeah. I think that’s absolutely right. Ithink that broadly over time, it would be good, in the same way thatthe government has a policy on things like housing finance, you know,it’ll be good for the government to have a broad policy framework forthis kind of stuff.
But like everything,it tends to start small. You address the easy questions first becausethey’re big and easy. And I think that’s what we’re talking aboutwith these Fiat backed stablecoins. And then you get to morecomplicated questions, like the Libra situation that you raised a fewminutes ago. You know, that’s got a lot of other issues going on withit. And what do we think about that? It touches multiple of ouragencies. At the end of the day I think you’ll see us address someframework questions as a government, and then you’ll have singleagencies and bilateral cooperation on things that don’t have the samebreadth of implication.
But I think thereare things you can expect to see coming out of us. I mean, we’vealready said a few things. We’ve said banks can custodycrypto-assets. We’ve said that banks can hold deposit accounts insupport of stablecoins. Should we say something about bank’s abilityto plug into blockchains and actually issue stablecoins?
I don’t know. And Idon’t know what the right answer is. But I know the market’s askingthose questions and we’ll have to figure that out. You know, do webelieve, for example, that banks should be node validators on ablockchain for other assets? Again, I don’t know, but that’s wherethese things lead and some of these things are broad enough tomention that we’ll coordinate on it, for sure. That’s what we dowell.
Moderator:We talked about a lot over the last couple of minutesabout regulatory coordination. But I want to focus now on is,industry led oversight and primarily as questions for you, Jay, butthen Brian, feel free to jump in as well. One of the things that Iread about a week or two ago was authored by David Weild, former vicechairman at NASDAQ.
And he wasinterviewed in the recent article in Forbes where he suggested theneed for the U.S. Government to empower a cross industry commissionto remove bottlenecks against innovation. And particularly as itrelates to listing settlement and custody of securities tokens. Andwe’ve previously heard from the CFTC Commissioner Brian Quintenz onthe importance of self regulatory organizations in this space. Givenhow encompassing the digital asset terminology is, is there a certainarea or several areas underneath that kind of all encompassing termthat you believe would either merit an SRO. Or you would be okay withkind of industry looking to join together in an SRO?
JayClayton, SEC: Well, I’m going to go back to the point Imade. What is the functionality that you’re providing? If thefunctionality that you’re providing is, you know, exposure to aventure? Well, that’s a security and we have an SRO for that.
If there’s somethingfundamentally new. Not that the technology is fundamentally new, butwhat you’re providing is fundamentally new, then you would thinkabout that. But, the short answer is I haven’t seen something that’sfundamentally new in terms of functionality. Like the OCC knows moreabout payments and bank participation in payments than anybody else.
I don’t think if wechange the technology that’s used to facilitate payments, we don’tneed to add an SRO to the OCC. That’s kind of how I feel about this.I don’t know, Brian?
BrianBrooks, OCC: I couldn’t agree more. One of the things thatI found surprising when I was actually working in cryptoland was howan industry whose underlying product was designed to make thingssimpler and faster, made the policy side of it so needlesslycomplicated. So there were multiple different groups getting togethersaying we need an SRO. We might need two SROs at one point, somebodysaid. Or possibly a whole new government agency or a Commission.
Listen, the point ofcrypto, like the point of all innovation in any area is to takeaspects of life we’ve lived with our whole lives and just make iteasier.
So we didn’t need anew Commission when cell phones got invented. We had an FCC and theyadopted a rule around cell phones and that was fine. And here we areand we have lots of different kinds of smart phones out there. Ithink it’s the same thing here.
I’m now justreiterating what Jay said. You know, keep it simple, stupid. Thepeople who’ve been successful in DC are the people who remember: keepit simple, stupid. If you’re trying to issue rights in a venture,like Jay says, that’s equity. We all know what that is.
I think securitytokens are great. Jay’s agency has now issued guidance about cryptoATSs and custody. And now there’s clarity about how that’s supposedto work. Fantastic. Some crypto tokens are about value transmissionand payments. We’ve issued guidance around that. I think it’s not inthe industry’s interest to have a whole bunch of governanceorganizations around this.
It’s in theindustry’s interest to do what they do well, which is invent product.Okay. We will try and create clarity around legal frameworks, usingthe tools we’ve got and where I think we’re moving faster than thegovernment ever has before. So that’s the great news. But industry isgreat at building product and that’s what it should do.
Government’sterrible at building products. So it shouldn’t. But it should setrules. That’s what we’re good at.
Moderator:Brian, I’ve got a couple more questions. I know we’re kindof wrapping up here for time. But Brian, let me direct this questionto you. Because I know it’s right in your wheelhouse. You’ve said ina recent interview, where you discussed how the old debates andpreviously held distinctions between banking versus investmentbanking or banking versus securities and I quote ‘all fell away inlight of economic demand’. When you talk about the payment space andyou’ve done so for the past couple of minutes now, but how are thesechanges occurring in the payment services technologies really drivingchange throughout the financial services industry?
And how canregulators encourage responsible innovation and progress in thisspace?
BrianBrooks, OCC: Well, I would just pick up on the point thatJay has been making for a while now, which is it’s really about sortof functional regulations. So the comment that I made that you quotedwas based on an insight that was written in a famous article in 1982.
It was about whetherbanks are special or not. And that article was talking about the ideathat in the late seventies and early eighties as debt securities andasset backed securities were first becoming a thing. Suddenly itlooked like banks’ role as lending institutions may not be special.And maybe that there are ways of borrowing that don’t involve a bank.
And that created anexistential crisis for what banks were. Because people realized thatdebt securities and bank loans are basically fungible. And a companycan choose to raise money by going to the bank or by issuing adebenture. And when you realize that, you start to realize that thehermetic walling off of investments on the one hand and banking onthe other hand, maybe kind of an atavism.
So having said allof that, when we look at the world of payments, what I’ve sort ofsaid is historically we think of banks as providing three corefunctions, deposit taking, payments and lending. We’ve seen in thelast ten years that it might be more profitable to offer some ofthose services on an unbundled basis.
This is why we havemultiple hundred billion dollar companies that are just paymentscompanies. That business that they’re doing was exclusively doneinside of banks 15 years ago. Nobody but banks did that business. Andnow suddenly an enormous amount of the activity has moved outside ofbanks.
So that’s kind of abig deal. Crypto is just the newest, at least certain aspects ofcrypto, the newest evolution of that trend. Here’s a way of offeringthat service, as Jay says, way more efficiently. But let’s not kidourselves. It’s still a banking service. That’s what the word means.It’s a kind of financial intermediation that allows you to pay me forsome service I provided you.
And at some level, Ithink it’s important for me as a functional regulator of bankingactivity to extend supervision and charter authority to thatactivity. And crypto is just an evolution of that same thing, Ibelieve.
Moderator:Let me kind of try and wrap things up here. I want toquickly touch on the way forward for your agencies. And Mr. Clayton,I think it’s no secret that you are likely to move on from yourcurrent role shortly. And certainly the upcoming election will likelylead to some leadership changes among the agencies, regardless of theoutcome.
Given all that thetwo of you have accomplished over the past several years or severalmonths at your respective agencies and all the changes that have andwill take place in the digital assets space in the future. How wouldyou like your agencies and successors to proceed on oversight of thedigital asset space and what mile markers are you setting now thatyou hope your agencies will reach or at least follow in the nearfuture?
Jay, let me startwith you. And then Brian, you can jump in.
JayClayton, SEC: Well, for those of you who think we’rehandling things in a responsible way, fear not. I have a great staff.These people, day in and day out, this is what they do. And they do agreat job. And then for those of you who were hoping for some radicalchange in approach, you’re going to be sorely disappointed, Iimagine.
But I think onething that happens in these jobs, is that over time you become moreattuned to how the regulatory framework of your agency impacts themarketplace and that dynamic. And how to use your obligation to betransparent, to facilitate competition, to facilitate innovation.
And largely whatBrian and I are doing today, I hope you agree with this, and what weexpect to continue to do, is be as transparent as possible as to howwe look at this and how our staff’s look at it, which hopefully willcontinue to foster innovation, but will make any transition a loteasier.
BrianBrooks, OCC: I would echo all of that and I would gofurther and just say the things we’re talking about today, happilyaren’t political. You know, there’s things at both of our agenciesthat are kind of political.
I mean, if you’vegot a new Controller and if there was a Democrat administration, youmight see a little bit more bank enforcement, you might see adifferent kind of approach to consumer protection than we believe isappropriate, whatever.
But I think thesekinds of things, these are infrastructure issues. I think bothparties want the country to be competitive globally. They both wantthe country to continue to be an engine of economic growth. I reallydo believe that. And you know, some of the ideas I’m talking about, Ilike to sell them and make them super glossy, but they wereoriginally the idea of President Obama’s Controller.
And some of them arenot. Some of them are new with me. So I would say a lot of thesethings are sort of our response to permanent changes in themarketplace. Those are not going to go away after the election,regardless of who wins. And I would echo Jay’s comment. I think thestaffs are very, very committed to the idea of safety and soundnessand growth.
That’s what theseagencies are fundamentally about. I don’t see that changing.
Moderator:So let me just end it there and let me say thank you toyou both for agreeing to do this. It’s been a great opportunity toask you some questions about it.
