Unchained - Acting Comptroller of the Currency Brian Brooks on Crypto Banks - Ep.196

Starting point is 00:00:00 Hi everyone. Welcome to Unchained, your no-hype resource for all things Crypto. I'm your host, Laura Shin, a journalist with over two decades of experience. I started covering crypto five years ago and as a senior editor of Forbes was the first mainstream media reporter to cover cryptocurrency full-time. Subscribe to Unchained on YouTube, where you can watch the videos of me and my guests. Go to YouTube.com slash C slash Unchained podcast and subscribe today. crypto.com, the crypto super app that lets you buy, earn, and spend crypto, all in one place. Earn up to 8.5% per year on your BTC and more than 20 other coins. Download the crypto.com app now to find out how much you could be earning. Today's guest is Brian Brooks, acting controller of the currency. Welcome, Brian. Thank you, Laura.

Starting point is 00:00:53 Your background has been pretty standard, traditional financial services related. you were at the law firm, Omelvany and Myers for 17 years, and you worked at One West and then at Fannie Mae as the executive vice president and legal counsel. Then in 2018,

Starting point is 00:01:07 you left to go to Coinbase. Why did you decide to take a leap into a more cutting-edge space? Well, here's the thing. Laura, it goes to show you can't judge a book by its LinkedIn profile. So when I was at Fannie Mae, we had a vision of changing that company

Starting point is 00:01:23 from what it had been, which was an old school mortgage investor, into a much more cutting-edge platform for housing finance. And what we meant by that was we realized that there were a bunch of fintech companies that were building APIs and building artificial intelligence algorithms, building geostationary satellite imagery-based appraisal tools and things like that. And so we suddenly started a fintech program at Fannie Mae that had never existed before. And as a result of that, I found myself on the board of a big fintech lender.

Starting point is 00:01:54 Later, I found myself as helping to do. found a blockchain-based digital credit bureau company. And I sat as a judge on these presentations of all of these really interesting companies that were bringing technology into the world of financial services. So by the time you fast forward to the moment and time you're talking about, when I decided to leave Fannie Mae to go to crypto world, crypto was only one adjacency beyond the fintech work I had already been doing. So I'd already drunk the Kool-Aid that were way better, way faster, way more accurate ways of doing business than the old ways. And crypto was to me like one leap beyond that. So less, less radical than it might have seemed, but it's obviously

Starting point is 00:02:32 a passion that I have. While you were at Coinbase, what did you see about how the traditional financial services world and the crypto world intersect? And what frictions did you see that you felt should be remedied? Well, there were a number of things on a number of dimensions. I mean, one thing that really stood out was how hard it was for companies like Coinbase to interact with banks just at a corporate level, forget about at the level of the actual cryptocurrency. So, you know, there are a lot of banks that don't want to have a corporate checking account or maintain a payroll account with a crypto company because of uncertainty about whether crypto itself is a bad thing. And so it took us a long time, you know, to onboard banking

Starting point is 00:03:13 relationships just to run the business. And then when it came to actually backing crypto projects, like, for example, when Coinbase was launching its stable coin in partnership with Circle, it was especially hard to get banks to be willing to hold the deposits backing those projects, right? It was one thing to say, gee, we can take the Coinbase payroll account, but another thing entirely to say, we will help this company actually issue a stable coin, meaning that we're now involved in a crypto project. And then we had similar issues abroad with, you know, the banks that were actually providing our fiat to crypto rails, where, you know, one foot fault, one BSA error. and boy, it might be the death penalty. So what I learned is, A, crypto companies need to mature and develop risk management tools and, you know, BSA, AML tools to work well with banks.

Starting point is 00:04:02 But even more importantly, banks need clarity from their regulators about what the regulators think about crypto to begin with. And so having experienced that firsthand, it's one of the reasons why I've tried to be just very overt with the crypto world about where we see the risks, but also where we see the benefits and where we're comfortable. And I think that kind of clarity will help banks understand what to avoid, but also what they should be serving in that market. When you were appointed acting control over the currency, do you know if your experience in this area and this cutting edge area and crypto played a role in your selection, meaning like at the federal level, is there recognition that crypto and blockchain will play a bigger role in financial services in the future? Well, look, I think the history of me and, you know, appointments in this administration is well enough known in the press.

Starting point is 00:04:51 I would probably say that my time in crypto didn't have much to do with my, you know, the decision to offer me this job. But what I do think is that at high levels of the administration, there's kind of a split of opinion on crypto with, I think, the trendline looking positive for the industry, but things are still a little bit unsettled. So if you look around and you see, for example, what Commissioner Hester Purse at the SEC is doing in the world of crypto or what Chairman Heath Tarbert at the CFTC is doing in crypto, or even in a number of other areas as well. There's clearly a group of people who are very interested in this and believes that the technology is fundamental for American strategic power in the world of financial services. I would say the chief technology officer in the White House, another person who comes out

Starting point is 00:05:33 of the world of crypto. On the other hand, you know, there are people who are more of a law enforcement bent who focus on the things that they know best, which is the true fact that. crypto has been used in a variety of money laundering and terrorism financing schemes. Now, regular banks have also been used in those kinds of schemes. And the message that I try to put out there is it's not that crypto is the safer alternative, but crypto is no worse than anything else on those measures and is a lot better on other measures, right?

Starting point is 00:06:02 My point is there are a lot of fans in the government. There's some detractors. And I think what we on the crypto side have to do is continue to tell the story that there are risks. The risks must be mitigated. but the benefits can't be thrown out simply because there are risks, because there's risk in the status quo. As you alluded to earlier, since you took office there, there have been a number of positive developments for crypto companies. One of the first is that in July, the OCC released a letter saying that banks have the authority to custody cryptocurrency for their customers.

Starting point is 00:06:34 One of the things that struck me reading the letter is that it appears that banks had the authority to custody crypto assets all along. For instance, it says, quote, national banks have long provided safekeeping and custody services for a wide variety of customer assets, including both physical objects and electronic assets. And then after describing some of those services, it says, quote, providing custody services for cryptocurrency falls within these longstanding authorities to engage in safekeeping and custody activities. So was I right in reading that into that that banks actually had this authority all along? Well, you know, yes, yes and no. So I think our. read is the law supports that, and that's why we put this out by means of a legal interpretation versus a rulemaking. We didn't think we were breaking new ground here. But on the other hand, it's sort of like in the law where one precedent leads to a similar precedent that's not identical, right? So like where did the right to an abortion come from? It came from an early case, establishing the right to raise one's children and educate them the way one wants to, which then

Starting point is 00:07:34 led to the right to use contraception, which then led to the right to an abortion. They were thought to all flow from some core right to privacy. But the abortion thing wasn't decided until many years after the first case on the right to privacy was decided. So it's the same thing here. We say to banks, you can custody gold. And then we say, well, you can custody stock certificates. And then we say, well, if you can custody stock certificates, you can also custody digital stock certificates. And then we say, well, if you can custody digital stock certificates, why not just a native digital asset like a Bitcoin, right?

Starting point is 00:08:04 Each one is related to another. They're not all identical. But we do think the precedent support the idea that if you can custody one financial asset, you can probably custody any financial asset. And so the letter also then made it clear that national banks can offer traditional banking services to crypto companies. And as you mentioned before, this has been a longstanding problem for many of those companies. And I just wondered, so do you feel like this letter is causing a change in attitude by banks where they don't view crypto assets, you know, as a whole class that's, you know, something to stay away from? Well, what I have heard in The Grapevine, and I'll bet a lot of your listeners have heard the same thing, is that since our letter came out, a number of big crypto custodians, Anchorage, Coinbase, and a number of others have been contacted by banks about whether they'd be willing to be like the third party custody providers for national banks whose customers want to invest in Bitcoin.

Starting point is 00:09:00 And so in a world where, you know, look, you've got major institutional endowments like the Harvard and Stanford endowments who are invested in, you know, significant amounts of Bitcoin. in a world where you have institutional investors looking for a qualified custodian for their Bitcoin and everything else, I think it is pretty likely that the trajectory will be that banks will not want to build their own custody capacity. This is very technically complex. But what they'll want to do is either buy crypto custodians or partner with crypto custodians to provide those services on their behalf. And now they can legally do that. Honestly, one of the most interesting things that I observed shortly after that letter came out, Laura, was that the price of most crypto assets went up in a few days following the release of that letter, which I think

Starting point is 00:09:42 signals that institutions felt safer investing in an asset that they could have custody in the bank. And so in general, what would you expect to happen? Just I would say maybe a few years from now as these developments play out and as these letters and the authorities they give to the banks kind of seep in and banks start to take advantage. Well, the first thing I think is that they're going to be demand side effect. And what I mean by that is there's a certain class of early adopter who doesn't care if something's risky or complicated to deal with. They want it early. I'm thinking of the people who bought the first video cassette tapes back in the 70s or the first people who bought compact disc players in the 80s or even the first people who bought those gigantic cell phones when they were first invented.

Starting point is 00:10:29 They were complicated and expensive, but some people love early adoption. What bank support will do is make these things safer for average people. So if your average person thinks it's prudent to have 50 basis points of their net worth in crypto, which, you know, is what a lot of investment advisors say is a prudent allocation, they're going to feel much safer knowing that, you know, J.P. Morgan is the custodian of their crypto than feeling like the custodian is some entity they've never heard of in South Dakota. So I think the demand increase is going to be noticeable. And as I say, you saw that in the price movement after we released our first letter. The other thing about it is there's a general normalizing effect when people start to realize. hey, here are the guardrails. We know where the danger stuff is, but we also know where the safe stuff is, and thus we can actually activate a crypto economy within that safe zone. And, you know, frankly, it's the simple fact, as we all know, that markets love clarity. So I'm not trying to be a cheerleader for this stuff. I mean, some of this stuff poses real risks to the system. But I do love clarity because then markets can work their magic once they know what the rules are.

Starting point is 00:11:31 And as these developments were happening, I'm sure you also saw the news about Cracken launching the first crypto bank. And there's another one that will shortly be coming on its heels from Caitlin Long. She's launching Avanti. Both of these came about through Wyoming's SPDI, special depository institution regulation. And I wondered, how do you see these different letters that you put out in the authorities they give to existing banks interplay? with these specific state regulations that try to help the crypto industry? Well, first of all, you know, one of the beauties of our federal system is that you can have a single country where some states think that the future is non-crypto and they adopt highly hostile rules. And then you have other states like Wyoming that are thinking, hey, this is something we really want to embrace as part of an innovation agenda. And so I think what Wyoming is doing is absolutely terrific. It's great to bring these things into the regulated environment, to allow them be supervised and then to allow markets to function. So I'm a big fan of theirs, and I think

Starting point is 00:12:35 it's terrific. You will see further crypto banks at some level coming in through the OCC in the coming months. I can tell you just based on early pipeline inquiries that we've had. So you'll see that at both the state and federal level. The point is, there's some states that are a lot less friendly to crypto than Wyoming is. Some of these states do have licensing regimes, but they're very difficult for their licensees, or they make it very hard to add assets or very hard to launch new activities. And I think you'll see competition between those states and Wyoming or between those states and the OCC and our federal charter in terms of what the right platform for this is. But look, the best thing about this country is the idea of federalism and the idea that we can experiment. We've always had a dual banking system of state and national national banks and we welcome what Wyoming's up to. I think it's terrific. So one thing that I know is your office is also pushing for a national fintech charter. And I wondered, and on top of that, then a national licensing regime, for payment companies, which would affect many crypto companies.

Starting point is 00:13:36 And I wondered, how would that affect things? You know, as you mentioned, there are some states that are less friendly toward crypto regulation. So something like the Bit License in New York, which has been pretty unpopular in the crypto industry. How would you see it affecting that? Well, so, you know, when I mentioned a moment ago, the idea of a dual banking system, the idea of the dual banking system was that, hey, there are some kinds of companies

Starting point is 00:13:56 that are perfectly adequately regulated in a single state. These tend to be either smaller companies or companies that are focused only in a set of customers that live in a certain geographic area. But then there was the idea, and this was a Hamiltonian idea, you know, back in the day, which said that as the country grew, we were going to need to knit ourselves together into a big national economy if we wanted to compete with the great powers of Europe. And so that's, you know, one generation later why the OCC was set up is to allow the country to have a single currency that was supported by a network of business. banks that could operate nationally. Here, what I would expect to see is the more mature crypto companies that are operating in all 50 states and operating globally are going to find over time that rather than having the BIT license and 42 money transmission licenses in other states and a state trust company, what they're going to say is, gee, it makes more sense to have

Starting point is 00:14:48 one platform that's legally authorized to operate every place, and that's the national bank charter. So, you know, that is our role in the ecosystem. It sometimes makes bank regulators at the state level, angry. And yet this is something that we've been fighting about as a country for more than 200 years, the idea that the federal government can do something. And when it does that, it can do so without regard to state laws and state licensing requirements. So, as I say, we've had plenty of crypto companies come in just over the last couple of months, inquiring about what it would take for them to get some form of national bank charter. And I expect that some of them, some of those will apply and will qualify. And along a similar line of thinking the conference of state bank supervisors recently announced a one company. any one exam policy for compliance exams for large crypto companies. And because of your national charter that you were suggesting, I wondered how those two would intersect. Well, I mean, look, as I said at the time, we congratulate the Conference of State Bank supervisors for recognizing what we've been saying all along, which is it's a little crazy to ask a single company

Starting point is 00:15:51 to undergo 50 different examinations every year. The problem with what CSBS has announced, of course, is that not all 50 states have joined. That's the first problem. And the second problem is that even if you only have one exam, the source of law that you're being examined according to is 50 different states. And so, for example, one state might have a 10% usury cap. Another state might have an 8% usury cap. And a third state might have no usury cap.

Starting point is 00:16:17 So it's all well and good to say, well, we're going to have a single examiner come in and see how you did. But the underlying rules you have to comply with differ from state to state. And so it's cold comfort to know that only. one person is going to assess whether you complied with all of those different laws. In the world of national banking, there's only one law that applies, no matter if you're doing business in Florida or Washington State or Maine. And that's federal law as enacted by the Congress. And that's yet another reason why the preemption of state law that OCC charters offer is ideally situated for some of these inherently borderless activities like payments. And when I say that, I'm including crypto companies

Starting point is 00:16:53 as a species of stored value or a species of payment activity. And so that's our thinking is, you know, we have state money transmission licenses, but it may be that the national bank charter is its own version of a national money transmission license for companies in that business. So as I'm sure you're well aware, there are some people that view, you know, what you're trying to do nationally as stepping beyond the OCC's remit. And this came up, I think, especially around. the charter for payments companies.

Starting point is 00:17:27 And again, with the bank charter for fintech companies, there was a federal judge that rule that the OCC can't implement such a thing without an act from Congress. So I wondered, given these kinds of battles, how long do you think it will take, well, actually, how long do you think it will take for this to play out, but also how likely do you think it is that OCC will win? I think it is, I don't want to jinx us, but I think it is, You know, 90 plus percent likely the OCC will win. The OCC has never lost a case in the U.S. Supreme Court.

Starting point is 00:18:00 And, you know, again, in the same way that one of the beauties of our federal system as the different states get to experiment with different, different, you know, policies, we have a judicial system that has a lower court and it has an intermediate appellate court and it has a Supreme Court. And that's for a reason because sometimes it takes multiple viewpoints to distill all of the issues. So there are a couple points that I would make to you. First of all, the fighting with the states over our power to charter financial services companies that don't take deposits. And that is what that litigation is about, is can we charter a company as a bank, even if it doesn't take deposits, is very similar to battles that the OCC has waged against the states and various other stakeholders over the last 50 years. There was a time, if you can believe it, when it was really, really controversial about whether national banks had the power to issue letters of credit. Well, that's one of the core bank powers now, but in the 1800s, it took the Supreme Court to decide that they did because a bunch of challengers challenged the OCC and its authority to do that at the time. If you fast forward to the 60s and 70s, there were these cases that we referred to as bank powers cases where there were questions about whether the OCC was authorized, for example, to tell banks that they could engage in data processing services for companies that weren't otherwise their banking customers.

Starting point is 00:19:13 Was that a banking activity to sell data processing? or was that like a technology service that was outside the charter. And people fought tooth and nail. And we had to go to the Supreme Court to win that case. There was a time in the 90s when the OCC wanted to allow national banks to deal in annuities on the theory that annuities were really just a species of savings account. And again, that went to the U.S. Supreme Court because it was very controversial and people fought tooth and nail.

Starting point is 00:19:35 We won all of those cases at the end of the day because the reason that the OCC was given the power to charter companies and to make decisions about companies was because of a recognition that over time, the way people obtain their financial services evolves. It evolves with preferences. It evolves with markets. And it also evolves with technology. So we can't hamstring ourselves to the way banking was done in 1895 or whatever just because, you know, that's the way somebody thinks of banking. My job is to figure out how do people consume financial services and to make sure that the banking charter is flexible enough to allow them to get them in a safe and sound supervised environment. The other thing I'd say about the one judge is, you know, judges get overruled all the time.

Starting point is 00:20:16 There are a lot of smart district judges that make mistakes or see it a way that is different from what the actual law is. And, you know, we think the judge who decided this case is a very learned and educated judge, but we do believe he's wrong. And that's why we've appealed it to a higher court. In a moment, we'll talk about stable coins, defy, CVDCs, and more. But first, a quick word from the sponsors who make this show possible. crypto.com, the crypto super app that lets you buy, earn, and spend crypto, all in one place. Earn up to 8.5% per year on your BTC. Download the crypto.com app now to see the interest rates you could be earning on BTC and more than 20 other coins. Once in the app, you can apply for the crypto.com metal card, which pays you up to 8% cash back instantly.

Starting point is 00:21:03 Reserve years now in the crypto.com app. back to my conversation with Brian Brooks. So as you mentioned, your office has now authorized national banks and federal savings associations to hold reserves for Fiat-backed stable coins. And in the stable coin guidance, the OCC said that it allows banks to manage funds in a hosted wallet, but that you are not, quote, presently addressing the authority to support stable coin transactions involving unhosted wallets. There are some people in the industry who've been wondering whether this means banks supporting or, or, or, crypto companies supporting unhosted wallens are prohibited from holding stablecoin reserves, or the banks, you know, working with those crypto companies are prohibited from holding stablecoin reserves. Do you have an answer to that? I do, and I'm really glad you're giving me an opportunity to

Starting point is 00:21:50 clarify something that I know has confused some people. So let me be super clear. Banks are engaged in a front-end part of a stable coin transaction and a back-end part of the stable coin transaction. We're not asking banks to try and police every other thing that occurs in the use of a stable coin. What we are saying is that when a dollar is received at the bank in respect of a stable coin, that transaction where the fiat comes into the bank, you know, in exchange for the purchase of a tether token or a USDC token or whatever, that transaction to fall within our letter needs to be coming from a hosted wallet. So for example, it's fine for the dollar to purchase a stable coin that's going to a Coinbase wallet or a Gemini wallet or a crack and wallet, not find her to go to an internet address that's not associated with that.

Starting point is 00:22:36 What happens from there is not the bank's issue, right? The bank at that point is received a dollar and it's holding that dollar in a deposit account. But the bank needs to know who the customer was who bought that stable coin. That person who bought the stable coin may then go and they may use it to buy a game token or they may use it to buy another crypto token or they may do whatever. And the bank's not a party to that transaction and doesn't know what's going on. Okay. But on the back end, the fourth or fifth or sixth downstream holder of that stable coin that had originally been purchased may now want to come and redeem that stable coin and take the dollar out of the bank account, right? That transaction also has to occur on a hosted wallet because the bank needs to know

Starting point is 00:23:15 its own customer. It needs to know who is it paying and who is it receiving funds from. The best analogy, Laura, that I think people in CryptoLand ought to be taking from this is the analogy of ATM machines. If I go to an ATM machine and I put in my card and I type in my pin, the bank knows who it's giving $20 to, right? It's giving the $20 to the cardholder, Brian Brooks. Now, I may take that dollar and I may go to the $7.11, and I may pay cash for a pack of chewing gum, and $7.11 may take that dollar, and it might go and do something else with it and something else, before finally that dollar makes it back into a bank account.

Starting point is 00:23:51 The bank is not obligated to trace that dollar bill everywhere it's going. That's not the way a cash economy works or the way that a synthetic electronic cash economy would work. But the bank, when it's either taking the dollar or giving the dollar back, needs to know who it's dealing with. And it also needs to know that the hosted platforms that is working with have BSA KYC procedures in place. That's all. It's really quite simple. Yeah. And just for that last step where someone's redeeming one of the digital dollars for a regular cash dollar, the way you stated in the example, it would be through the crypto company and not through the bank itself. Right. I mean, so normally what happens when you have a stable coin redemption is that the person who has the stable coin presents it back to the platform and says, I'm going to redeem it. So this is what we call minting and burning, right? The stable coin issuer mints the stable coin when someone comes and buys it for a dollar or whatever. And then when the person presents it back and says, I'm ready to redeem this and I want to withdraw a fiat off platform, that's called burning the stable coin, as you know, and that stable coin is then, you know, cryptographically canceled on the blockchain. And so the bank essentially gives it to the crypto platform to give to the user.

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Starting point is 00:26:03 That's why CBC News is putting more journalists in more places across Canada, reporting on the ground from where you live, telling the stories that matter to all of us. Because local news is big news. Choose news, not noise. CBC News. So everybody's been talking about Defi. and in 2019 FinCEN released guidance for cryptocurrencies that largely said that its regulations applied to hosted wallets, but not for unhosted wallets in which a user would manage his or her own private keys. The OCC's mission, as far as I can tell, is all about regulating banks and their activities, whether that's payments or lending or what have you.

Starting point is 00:26:46 And when it comes to DFI, do the OCC's regulations also cover DFI lending, payments, etc? even though these are typically non-custodial services? So let me try and answer that a couple different ways. So first of all, let me begin with what I think of as the OCC's mission, which is not merely regulating national banks. I think that the OCC's role is in promoting a safe, sound, and strong national banking system, which is important for national economic growth.

Starting point is 00:27:18 That's really how I see us as operating. And so we don't just regulate these companies, but we think about the shape of the charter, et cetera, et cetera, to make sure that the country's economic growth, which is built on the foundation of banking, can be strong. So coming to your specific question,

Starting point is 00:27:33 the way I see all of this evolving in the world of defy is, historically, the OCC is focused on regulating entities, right? So we have a company called a bank, and we can go look at that bank and ask, did the bank comply with the law on any given issue. So let's say we're talking about, for example, consumer protection law or fair lending law, You know, if I discover that a lending operation is charging more to black people than to white people, what I do is I find the operator of that lending algorithm, which tends to be a bank, and I can bring an action against that bank.

Starting point is 00:28:05 I could sue the bank, I could shut the bank down. I could order that the bank pay remediation or whatever. What Defi does is it challenges the entity-based focus of law enforcement and supervision because there is no entity, right? There's just open source software. And so if the open source software is generating all kinds of bad outcomes, who do I go after? That's the challenge that regulators have in a world of decentralized finance. Now, the answer could be several different things. One is, you know, most of these defy companies were originated on a platform.

Starting point is 00:28:37 So like, you know, ETH, for example, not that ETH is DFI, but as an example of a blockchain, ETH was originated by a group of guys and we know who they are and they have a foundation. But it's open source and now the world is off there doing what they do on it. and those guys didn't build that. Still, at least we know who the original people were and we can go talk to them. That's sort of the first potential. But the second potential is the beauty of open source software is there are virtually no transaction costs or frictions to changing the open source software. And so you can imagine a world where normal concepts of supervision don't really apply because, you know, you could say, well, there's a market for 4% loans and a market for 3% loans.

Starting point is 00:29:15 And the algorithm can be modified to accommodate all of those things. And so you could imagine that whoever took out the 4% loan instead of the 3% loan did so for a reason. And we would infer that because this other kind of loan is freely available on chain just like this one was. And yet the person selected this in the absence of transaction costs. So these are fairly complex intellectual ideas we need to think through more carefully. I don't think the bank regulatory system is ready for this yet. And I don't have a magic answer to it. But I do at least know what the problem is.

Starting point is 00:29:46 The problem is how do you take entity-based regulation and apply it to activities that don't have an entity behind it? Whoever solves that, of course, deserves a Nobel Prize. So we're going to work hard on that and see if we can put ourselves in contention. So I have a couple of questions. The first is around that first example that you gave around Ether, where, you know, who created Ether and so you could go talk to them. And by talk to them, you know, I kind of wondered what that means in terms of regulatory. and also the enforcement of the regulation, would that mean that that group of people would also be the people that you could bring an enforcement action against?

Starting point is 00:30:26 Yeah, well, I mean, look, I don't want to go too far out on this limb because I'm speculating a lot. But you can imagine a world where somebody builds an algorithm that purposely misstates the interest rate or purposely, you know, has a discriminatory component to it or purposely, you know, is skimming a few cents off of every transaction and transmitting that to the token holders or something like that in a way that's not disclosed. If you discovered that, if you discovered that the software was in fact doing that activity, sure, you could go to whoever originated that platform and you can investigate whether they're the ones profiting from it and perhaps you could sue them. You know, maybe you could do that.

Starting point is 00:31:02 But the point I'm making is that in an open source environment, once the initial version is launched, you know, as soon as the first set of changes are made, the initial people aren't necessarily responsible for what the software algorithm is doing. And so, again, I come back to the idea of that presents regulatory challenges. Now, there are a bunch of solutions that I've heard people talk about on this. One would be imagine a world where there was a central government blockchain and all other chains sort of connected to it. And the government blockchain allowed the government to make its own changes. And as it saw errors in the code or discriminatory features, it could simply go in directly and fix them. I mean, that could be a potential solution. So I'm making some of this up. And some of this

Starting point is 00:31:42 is very future speculative in nature. But again, the challenge we'll have to come up with is a challenge where there's no target to go after and yet there's still issues occurring. How do we square that circle? Yeah, well, I don't know if the community, well, just knowing how the community tends to react to what it uses censorship or a single point of failure or control, I would imagine something where the government just goes in and changes things, maybe wouldn't be amenable or it would create networks that wouldn't necessarily be used by the vast majority of people. However, I did wonder if what you meant was that the government or regulators would participate in the governance of these platforms where, you know, you have a certain number

Starting point is 00:32:29 of tokens and then you can, you know, vote on the different upgrades and something like that. And do you ever see a day when the regulators might do something like that? Well, I can imagine two states of the world. I think the idea of governments doing that is pretty far-fetched. I don't want to say impossible. One can imagine it could be possible, but I can imagine the government of Singapore doing that a lot more readily than the government of the United States doing that, to be honest. But what I do envision as a world where one of the roles of banks, right, is to be nodes on those networks and to have tokens that allow them to vote up and vote down various different changes in the algorithm. And if you think about it, that's kind of the

Starting point is 00:33:05 banking system we have today, right? We don't have a single bank of the United States. What we have is J.P. Morgan and Wells Fargo and Fifth Third and Huntington and, you know, a whole bunch of banks that are part of a kind of a network today. And that's the way that money is transmitted to the system is through this network of banks. So in a future of Defi, I envision that one of the roles of those banks is to be network nodes that would be upvoting and downvoting various things and playing the same kind of ecosystem effect that they really have played since the 1860s when the first national banks were created. So the Federal Reserve said that it is exploring a central bank digital currency, and you've said you believe one should be designed by the private sector.

Starting point is 00:33:45 Can you flesh out what roles you think the public and private sector should have and also what role you think commercial banks should play in the issuance of a CBDC? Yeah, well, I mean, first of all, when people say CBDC, there are a lot of things they might mean, but I think what they really mean is a dollar that trades on a blockchain, right? A dollar that is instantly transmissible and programmable and all those other things. If that's what we're talking about, we don't need to invent that. that already exists. What has been missing to date is some kind of regulatory framework around such tokens that would give people comfort that if they take this dollar from Gemini or Paxos or whoever, that it's going to be safe, that it really will be worth a dollar and that when the dollar is redeemed,

Starting point is 00:34:27 you know, when the stable coin is redeemed, there's a dollar somewhere to look to, to be made whole. But those projects already exist and they're growing at an asymptotic rate. I mean, if you look at the growth rate of the major U.S.D. stable tokens. They have been basically doubling in market cap every 60 days for the last four or five, six months. It's kind of astounding. If you compare that to the idea of, well, what if we had the Federal Reserve or some other government entity build what amounts to a stable coin, you know, their version of a digital dollar, you're told that the earliest date we can expect such a thing is four years from now. Now, I was just thinking like the entire Lewis and

Starting point is 00:35:05 Clark expedition took only two years, but it's going to take us four years. to build a government-built token. Laura, this isn't what government's good at. Government's terrible at building stuff. Like when we built the space shuttle, the government didn't build it. They hired Lockheed and Martin Marietta to build it. Raytheon, right? Same thing here.

Starting point is 00:35:25 We've got tech companies that know how to build this stuff and they've already built it. What government needs to do is what it is good at, which is put audit rules, put consumer disclosure rules, put sort of collateral standards around this so that markets can have confidence that the money's there. But don't build the tech. Why would you ever do that? That's not what governments do well. That's what tech does well. So, but just to make a distinction, so then, who would be the issuer? Would it be, would it still be the central bank? The, so the con, I mean, listen, I think most, most readers are familiar with the concept of the Fiat back stable coin. The binding constraint on the supply of Fiat back stable coin is the amount of

Starting point is 00:36:06 dollars in circulation as determined by the central bank. But the stable coins themselves are not issued by the central bank. I mean like Circle and Coinbase issue a stable coin, not the Federal Reserve, but that stable coin is issued with the promise that it's redeemable for a dollar, right? Same with all of these other fiat back tokens. So the Federal Reserve has the monetary policy role of determining how many dollars are out there. And by definition, you can't issue more stable coin than there are dollars in circulation because you can't sell the stable coin until somebody gives you the dollar. That's what I'm talking about, about regulators putting in place parameters and frameworks that say things like, how do I know at any given moment there are at least as many dollars on deposit as there are outstanding stable coins? Government needs to tell us that. Those are the kind of rules that government does well.

Starting point is 00:36:52 Oh, okay. So it sounds like what you're in favor of isn't actually how most people would define a central bank digital currency. Right. Well, that's my whole point is we have a choice in this country. The choice is, do we think the best way to digitize the dollar is to have a central bank digital currency, meaning something built by the government with whatever features the government deigns to give us? Or do we think it's better for private innovators to develop different kinds of tokens that are fully fungible with fiat dollars, but they can be available yesterday? That's the choice that we have to make. The analogy I sometimes give, Laura, is, is, you know, the Federal Communications Commission has jurisdiction over telecommunications. Now, we could have chosen as a government to have the FCC build cell phones. And we could all have our government issued cell phone and they would all look the same and they'd have whatever features the government wanted to give us. Or we could have an FCC that instead says, hey, here are the rules governing wireless telephony. But we're totally fine if Apple wants to build the iPhone and if Google wants to build Android phones. That's totally fine.

Starting point is 00:37:57 and they can all have different features and they can respond to market demands. Again, the role of the OCC and the Fed shouldn't be to build, at least in my opinion, shouldn't be to build a digital currency. It should be to do what the FCC did with phones. Tell us the rules that digital currencies have to sort of conform to and then let the market build what people want. Whoever's had a great experience with government-produced product, they should raise their hand. But I think generally speaking, what we like in this country, the beautiful experience that get created in this country are created in the private sector with the government establishing rules.

Starting point is 00:38:33 And then what role would the commercial banks play? Well, the commercial banks would, first of all, be the depositories, as we've said they can be under our most recent letter. But commercial banks also eventually, you know, I can envision would be nodes on these, on these blockchains. And they could themselves be issuers, you know, in the same way that Paxos gets to issue its own token, why couldn't J.P. Morgan issue its own token, right? They've already created a private token. Why couldn't they have a public token as a more efficient way of managing the payment

Starting point is 00:39:02 side of their business? I think there's no reason to think banks wouldn't do that. I'm guessing that there will be a battle up ahead at some point over privacy as bigger financial institutions begin wanting to transact more via blockchains and also as more regulation comes to this face. And so we'll have on one side this greater push toward adopting privacy and transactions, whether that's in lending or payments, and on the other side, maybe a push against privacy. And I wondered what stance the OCC would most likely take toward more privacy in blockchain-based transactions? Well, so this is a really complicated question. And, you know, from the where you stand depends on where you sit kind of department, I would say that privacy in the

Starting point is 00:39:48 U.S. financial privacy, you know, in the tactical protocol looks a lot different and raises a lot of different issues compared to financial privacy and some other parts of the world. So the analogy I often give is if you are a dissident in Cuba or if you live in Venezuela or whatever, you probably care a lot more about financial privacy and your individual transactions that we do in the U.S. And that's because, A, you care a lot more about the government not knowing that you're giving money to a political dissident or that you're sending money to a disfavored relative or whatever. In the U.S., where we are legitimately a target of terrorism every day, it feels a little bit different. Yes, there's some things we'd probably rather buy privately, but as a society, we seem to have

Starting point is 00:40:35 made the judgment that the threat of people using our financial system for illegal or even terrorism purposes is sufficiently tangible that we need to protect against that and thus give up some privacy in favor of that. So I think that there's a little bit of schizophrenia in the United States over these two things in which side do we really believe. There are times when we say we really believe in privacy as when we tell Facebook they shouldn't be using our data for any purpose and we should have total control over what data exists and who can be shared with. But then there's another side of us when we look at things like the travel rule, you know, which is applicable to platform-based crypto transactions where we've said, no, no, no, we want the government to know about all of those transactions and send. receive information has to be appended to every single transaction on a platform. So I think we need to resolve those as a society. We haven't done that yet. So one of the great things about our

Starting point is 00:41:25 interagency process is we suss those issues out. We hear all the different views and then we try and balance them. That's a work in progress at this point. As you just referred to U.S. regulators do you have a reputation for being stricter than other regimes around the world, but also for not offering as much clarity as the industry would like, as someone who worked recently in the industry and now you find yourself on the other side. I wonder what you thought can or should be done to ease the frustration the industry feels with U.S. regulators. Well, I mean, the first thing we can do is we can provide some gosh darn clarity, right? That'd be the first thing we could do. That doesn't count that hard. But over what issues in particular? Well, I mean, look,

Starting point is 00:42:04 part of what you're dealing with in the U.S. government is the decentralization, ironically, of authority. So if you went to the U.K., there really only one or two regulators you ever need to talk to. There's the Bank of England and the Financial Conduct Authority. If you deal with those two regulators, you've more or less covered your waterfront. Here, you know, you've got a banking regulator, you've got a bank holding company regulator, you've got a bank deposit insurance regulator, and then you've got the securities regulators who are separate from the commodity's regulators. So the questions I look at are in my little world of banking. It is how can we envision a role for banks in a decentralized financial environment? That's something we need clarity on.

Starting point is 00:42:43 And then what are the legal powers of banks to custody, to transact, to accept deposits in, or to remit payments in crypto denominated assets? Those are kind of the banking questions. But then, of course, I don't control the securities markets. And so who's going to tell us whether, you know, XRP is a security or, you know, whether something else is a violation of the Commod of the Exchange Act? You have to talk to those other regulars. And that's, again, partly a strength of our system because power is diffused. and so it's not concentrated in one set of hands. But on the other hand, it makes it harder to give clarity.

Starting point is 00:43:17 So my promise of the industry is, as long as I'm here, I will provide as much clarity as I can on all of the crypto matters that are within my jurisdiction. You've seen us starting on that. We have more to say if there's time. Yeah, this summer the OCC solicited requests for comment on proposed rolemaking on digital banking activities, including around cryptocurrency. And I wondered what all the different facets were of the cryptocurrency industry that, these proposed roles might cover? Well, first of all, let me just say, we were really, really gratified with the, with a number and quality of comments that we received from a lot of different places,

Starting point is 00:43:54 including crypto trade associations, but also community groups and consumer advocates and, you know, crypto companies, be the exchanges, custodians, or project developers. And, you know, the kinds of things that came out of it, I would tell you, would be comments like should cryptocurrencies be regarded as foreign exchange? So we all know that you can go to a bank and you can buy yen and euros as well as dollars, but you can't currently buy Bitcoin. Should we look at that and think that's part of a bank's exchange powers? So we're thinking about those kinds of questions.

Starting point is 00:44:27 There are questions about custody and other things which you've now seen us resolve. Then there are questions about like deposits. Can a bank accept as a deposit something that's not a U.S. dollar? They shouldn't be that complicated questions, but they're unsettled and raised policy issues. And so we have to think carefully about those. So I can't tell you all of the places will go in response to those comments. We're still analyzing them and thinking about what the appropriate next steps are. But we did get a lot of comments on those kinds of issues from a array of companies.

Starting point is 00:44:56 And stay tuned, is what I would say. How do you think the pandemic, its effect on the economy and the stimulus response will affect the growth of the crypto industry and or the adoption? of crypto? Well, I mean, there are two obvious drivers going on here. So one obvious driver is that we now live in a world where nobody wants to touch cash, right? And so the idea of any digitized means of value exchange is going to be more attractive than it was before, for sure. Indeed, there are a lot of businesses you go to nowadays, especially small businesses that won't even accept cash. So there's that. More fundamentally, and this might be good for the crypto industry, this might be really, really bad for the world, is to do this stimulus, we have printed a lot of money.

Starting point is 00:45:42 And the more money you have sloshing around in the system, the less valuable each unit of the money is, right? Because it's a commodity of their supply and demand. So we printed about $4 trillion of new money. And depending on what happens with a next CARES Act package, depending on whether there's a new administration that raises taxes significantly and whatever, we could be in a very different world of monetary policy very soon. modern monetary theory will have consequences. That's, as you remember, the core thesis of Bitcoin was unlike fiat money, it can't be debased. You can't order the Bitcoin algorithm to print more Bitcoin. It's only ever going to be so much. And so that means that in a certain future world, we could have a lot more volatility in the fiat money than we currently have in Bitcoin.

Starting point is 00:46:25 That's the world turned on its head, and that's a scary world to think about. But that thing happening would tend to drive up Bitcoin prices because it will be seen as a better store of value if those things were to transpire. And I also wondered if you thought these factors like the pandemic are making regulators have a more favorable attitude toward crypto? Well, I don't know. I think that the regulator's attention on crypto in the last year or so has been driven by a lot of other things, less pandemic related, I would argue, and maybe less pandemic related than it should have been. We can come back to that. But more around issues of competitiveness, right? So we're seeing that the EU has released a stable coin framework, at least in draft form. You see that China has actually already issued the EREM to B, and they're now distributing it broadly through a series of air drops. The question is, where's the U.S. in all of this? I mean, it's not an answer to just say we're really worried about AML, and so we need to take a law enforcement lens.

Starting point is 00:47:20 I mean, of course we have to do that. But these other countries are seeing crypto and stable coins in particular as a strategic advantage. And we haven't figured that out. So we really have to get on the stick here. We need to move faster to say what the framework is and to move the country in that direction. That's the way that I'm seeing governments think about it. Less pandemic related, more competitive related. Our discussion has been pretty focused on these somewhat arcane things like the different charters or licensing regimes.

Starting point is 00:47:49 But in interviews, you've said your ultimate passion is for the system to be more inclusive so people can build more wealth. How do you hope to achieve that from your position now? Well, look, we live in a world where finance is fundamentally centralized. It's centralized around banks, right? And so the concept of centralization is one in which there are many tolls getting collected. You know, if you want to open a checking account, unless you keep a minimum balance, you have to pay a fee every month. If you want to send a wire to somebody, you have to pay a fee for that. If you want to send an international transaction, that costs, you know, not only the transmission fee, but also the foreign exchange fee. The whole point of centralization is that whoever the central gatekeeper is is a toll collector, and they get to collect tolls for everybody wants to pass by. That means poor people who can't afford the toll can't pass by. It means other people who can't afford it still get the cream skimmed off of their transaction before they were able to do it.

Starting point is 00:48:44 The point of technology, right, is to disrupt all of those things. Technology can do for free what it takes humans, a lot of time and money to do. And so the ultimate inclusionary benefit of an open financial system, which is what crypto promises is a world where we take things that cost money and we make them free, right? Remember, we used to have to pay 44 cents to send a letter. Now we sent an email for free. That's what crypto is about doing in the world of finance. All right. Great. Well, this has been such a wonderful conversation. Thanks so much for coming on Unchained. And unless I forget, where can people learn more about you and the OCC?

Starting point is 00:49:21 Well, the OCC is at OCC.gov, and people can always look up my bio on that. You can also look up OCC.gov slash reach about our financial inclusion initiative project reach, which I encourage everybody to support and learn more about. But Laura, it's been a great conversation. I really appreciate you having me. Thank you. This has been wonderful. Thanks so much for joining us today. To learn more about Brian and the OCC, check out the show notes for this episode. Don't forget, you can now watch video recordings of the shows on the Unchained YouTube channel. Go to YouTube.com slash C slash Unchained podcast and subscribe today. Unchained is produced by me, Laura Shin, with help from Anthony Youen, Daniel Daniel Ness, Bossie Baker, Shishonk Fankhott, and the team at CLK transcription.

Starting point is 00:50:01 Thanks for listening.

Unchained - Acting Comptroller of the Currency Brian Brooks on Crypto Banks - Ep.196

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