Thread by @BrianBrooksUS

Many of you have asked my views on the recent “Joint Statement on Crypto-Asset Risks to Banking Organizations” issued by the @usocc @FDICgov @federalreserve . Some observations in the form of a short 🧵: occ.treas.gov/news-issuances…

(1)   The agencies state that “risks related to the crypto-asset sector that cannot be mitigated or controlled do not migrate to the banking system.”  But the purpose of banking supervision is not to keep out risk; it is to create a safer risk intermediation framework.

(2)   The banking system contains numerous risky assets.  Consider mortgages: 1.9% of all mortgages were 90+ days delinquent as of year-end 2021.  corelogic.com/intelligence/u…

(3)   Or credit cards, which have a 2.08% delinquency rate in the most recent quarter.

(4)   Banks are also exposed to asset price volatility through their participation in foreign exchange, commercial real estate loans, and numerous other sectors.

(5)   Apart from asset prices, banks are exposed to risks in the system itself.  In February 2021, for instance, payment services administered by the @federalreserve went down for several hours, impairing around $3 trillion in payments. cnn.com/2021/02/24/bus…

(6)   This doesn’t mean more risks in banking are better.  It means that the very purpose of banking supervision is to take inherently risky activities and subject them to rules and supervision – thus reducing overall systemic risk.

(7)   So how can banks reduce risk in the crypto sector?  First, CUSTODY.  Market structure rules dictate that brokers be separate from custodians.  If a bank had been the custodian of @ftx_official customer assets, FTX couldn’t have misappropriated customer assets.

(8) Also payments and stablecoins.  @USOCC guidance dictates that stablecoins be fully reserved by risk-free assets and redeemable at par on demand – obviously a better framework than unregulated stablecoins backed by more questionable collateral. occ.gov/topics/charter…

(10) Bottom line: The current approach hasn’t made the world less risky. It has prevented us from using proven risk tools to manage an asset class that has strong market demand.

(9) Finally, what to make of the agencies’ skepticism about public #blockchains?  For the best discussion of this, hats off to @jerallaire.  medium.com/@jerallaire/th….  Couldn’t agree more.