The American Bankers Association (ABA) has called for the creation of a national database of digital currency companies and exemptions for banks from future licensing requirements.
The proposals were outlined in a 16th February letter sent to the Conference of State Bank Supervisors (CSBS), an organization made up of state banking regulators that released a draft framework for digital currency licenses in December.
The CSBS held a two-month comment period following the publication of its proposal that regulators require bitcoin companies to obtain licenses. This approach is being adopted by New York and is under discussion by other US states like New Jersey. The organization has also held hearings on the subject of bitcoin regulation.
The ABA counts American banking giants like JPMorgan, Wells Fargo and Bank of America Merrill Lynch among its membership, as well a large network of small and medium-sized banks in the US. The ABA was among a number of organizations that issued comments during the 60-day period.
The group called on the CSBS to produce a licensure framework that would homogenize oversight of digital currency businesses between state regulatory agencies. Its letter was in response to a series of questions posted by the CSBS in their original proposal.
While the letter points to bitcoin and other digital currencies as innovative forces in the area of payments, the ABA argued that the CSBS should adopt a licensure-based framework because of the systemic risks it sees with bitcoin. The organization acknowledged that these risks have yet to have an impact on the broader financial system, noting:
“Although none of these failures have yet to feed directly through to the traditional payments system, as virtual currency usage grows it will become more tied to our traditional payments system. In the future, such failures could have system-wide consequences.”
In addition to arguing for a data-sharing system and exemptions for banks from new rules, the ABA called for companies that hold digital currencies for customers to be subject to the Electronic Funds Transfer Act (EFTA), adhere to know your customer (KYC) and anti-money laundering (AML) rules, and pay fully into state-funded insurance schemes or trust funds prior to access.
National database proposed
The concept of sharing information between state banking regulators about companies handling bitcoin was included in the draft proposal from the CSBS.
“A critical piece of such a [licensure] system is the ability of states to share licensing and enforcement data in real time,” the organization proposed at the time.
The ABA suggested modeling a national database of digital currency on the Nationwide Mortgage Licensing System, a registry of mortgage brokers and originators launched in 2008 that was later expanded to cover a broader range of financial services.
“Such a registry would allow regulators to verify a business’s status in other states and allow consumers to ensure that a business is registered before doing business with it," the ABA wrote.
On fraudulent transactions
The CSBS proposal suggested that digital currency businesses fall under federal statutes including the EFTA. The ABA cited Regulation E as a means for regulators to assign liability in instance of fraud, but outlined how applying the statute could prove complex given the nature of bitcoin transactions.
"As bitcoin transactions are irreversible once posted to the blockchain, consumers have no recourse to reclaim their funds," the organization wrote. "If Regulation E applied, wallet providers would be responsible for making customers whole following fraudulent transactions just as banks are."
The ABA goes on to say only in instances where a wallet provider has knowledge of both transaction parties would fraud claims be relatively simple to settle, noting:
"It will be difficult to apply Regulation E to direct transactions between customers that have no prior relationship or agreement to participate under any rules regarding reversals of payments. Without the participation of a clearing house or payment network, virtual currency transactions are the equivalent of cash changing hands in the street."
"When your pocket is picked Gucci doesn’t reimburse you for your loss," the ABA added.
Bank carveout requested
In its letter, the ABA called for a "level playing field" among companies offering service in the payments space, suggesting that competition in the marketplace would be stifled otherwise.
The ABA wrote:
"All participants in the payments system should operate by a similar set of rules and standards. This ensures that all participants have parallel financial incentives to innovate, and eliminates anomalies in the market driven solely by government policies that apply to some players but not others."
Arguing that banks are already regulated under what it characterized as significant oversight, the ABA requested that the CSBS consider proposing exemptions for banking institutions under future digital currency licensure regimes.
"Subjecting banks to duplicative regulations would add no additional protections to consumers, and would divert bank resources from serving their communities," the letter stated.
The full letter from the American Bankers Association can be found below:
The proposals were outlined in a 16th February letter sent to the Conference of State Bank Supervisors (CSBS), an organization made up of state banking regulators that released a draft framework for digital currency licenses in December .
The CSBS held a two-month comment period following the publication of […]