Acting Comptroller of the Currency Brian Brooks on Crypto Banks

Brian Brooks got his start in traditional finance before joining Coinbase in 2018 and is currently the acting comptroller of the currency. In this episode, he discusses:

• how his background in traditional financial services led him to take a position at Coinbase
• whether the role blockchain and crypto will likely play in the financial future is being recognized at the federal level
• whether or not banks have always had the authority to custody crypto for their customers
• how he expects things to unfold in the coming years as banks begin to become more involved in crypto custody
• his thoughts on Kraken and others launching crypto banks and whether it will lead to the founding of other crypto banks
• how his office is pushing for a national fintech charter, and how it could affect less crypto-friendly states
• whether banks that work with crypto companies supporting unhosted wallets are prohibited from holding stablecoin reserves
• whether or not OCC regulations cover DeFi, and the regulatory challenges that open source protocols present
• whether he sees a time when governments and regulators participate in the governance of crypto platforms
• what roles he thinks public and private sectors, as well as commercial banks, should play in the creation of a central bank digital currency
• what stance the OCC might take around privacy in blockchain transactions
• how U.S. regulators can offer more clarity to the crypto industry
• and how he thinks the pandemic, its effect on the economy, and the government’s response through stimulus will affect the crypto industry

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Episode links: 

Brian Brooks: https://twitter.com/BrianBrooksOCC

Office of the Comptroller of the Currency: https://www.occ.gov

Letter to authorize banks to provide crypto custody services for customers: https://www.occ.gov/topics/charters-and-licensing/interpretations-and-actions/2020/int1170.pdf

The significance of the letter for banks and crypto companies: https://www.forbes.com/sites/matthougan/2020/07/27/the-occs-notice-on-crypto-is-a-really-big-deal/#13aad8806301

The OCC’s statement on federally chartered banks and crypto custody: https://www.occ.gov/news-issuances/news-releases/2020/nr-occ-2020-98.html

His support for a federal licensing framework for crypto companies: https://www.coindesk.com/us-banking-regulator-suggests-federal-licensing-framework-for-crypto-firms

Questions about the OCC’s stablecoin guidance

CSBS “One Company, One Exam” policy: https://www.coindesk.com/csbs-firms-explained

Battle with states over federal licensing program: https://www.politico.com/news/2020/08/31/currency-comptroller-reshape-banking-406393 

FinCEN’s 2019 Regulatory Guidance: https://www.fincen.gov/news/news-releases/new-fincen-guidance-affirms-its-longstanding-regulatory-framework-virtual

Federal Reserve says it is exploring a central bank digital currency: https://www.coindesk.com/fed-reserve-evaluating-digital-dollar-but-benefits-still-unclear-says-chairman 

His view that a CBDC should be designed by the private sector: 

The OCC’s Financial Inclusion Project: https://www.occ.gov/topics/consumers-and-communities/minority-outreach/project-reach.html

Transcript:

Laura Shin: 

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 at 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/c/unchainedpodcast and subscribe today. 

Laura Shin:

Today’s guest is Brian Brooks, Acting Comptroller of the currency. Welcome, Brian.

Brian Brooks:

Thank you, Laura. 

Laura Shin: 

Your background has been pretty standard, traditional financial services related. You were at the law firm of O’Melveny & 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 you left to go to Coinbase. Why did you decide to take a leap into a more cutting-edge space?

Brian Brooks:

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, you know, we had a vision of changing that company 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. Later I found myself as helping to 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 in time you’re working about when I decided to leave Fannie Mae to go to the crypto world, crypto was only on adjacency beyond the fintech work I had already been doing. So, I had already drunk the Kool-Aid that they 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 radical than it might have seemed, but it’s obviously a passion that I have.

Laura Shin: 

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?

Brian Brooks:

Well, there were a number of things on a number of dimensions. You know, one thing that really stood out was how hard it was for companies like Coinbase to interact with banks, just at the 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 relationships just to run the business, and then when it came to actually backing crypto projects like, for example, when Coinbase was launching its stablecoin, in partnership with Circle, it was especially hard to get banks to be willing to hold the deposit backing those projects, right. 

It was one thing to say we can take the Coinbase payroll account, but another thing entirely to say we will help this company actually issue a stablecoin, meaning that we’re now involved in a crypto project, and then we had similar issues abroad with the banks that were actually providing our fiat-to-crypto rails, where you know one footfall, 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 the banks, 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 have 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.

Laura Shin: 

When you were appointed Acting Comptroller of the currency do you know if your experience in this cutting-edge area in crypto played a role in your selection? Meaning like at the federal level, is there a recognition that crypto and blockchain will play a bigger role in financial services in the future?

Brian Brooks:

Well, look I think the history of me, and you know appointments in this administration is well enough known in the press. I would probably say that my time in crypto didn’t have much to do with the decision to offer me this job, but what I do think is that at the high levels of the administration there’s kind of a split of opinion on crypto with I think the trend line looking positive for the industry, but things are still a little bit unsettled. So, if you look around and see for example what Commissioner Hester Peirce at the SEC is doing in the world of crypto or what 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 of the White House, another person who comes out of the world of crypto. On the other hand, you know there are people who are more of a law-enforcement bend 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 kind of schemes and the message that I try to put out there is, it’s not that crypto is a safer alternative, but crypto is no worse than anything else on those measures, and is a lot better on other measures, right. 

My point is there are a lot of fans in the government. There are 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. 

Laura Shin: 

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. 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, “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, “providing custody services for cryptocurrency falls within these long-standing authorities to engage in safekeeping and custody activities.” So, was I right in reading into that, that banks actually had this authority all along?

Brian Brooks:

Well, you know yes, and no. So, I think our read is the law supports that and that’s why we put this out there as a 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 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, right, 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 the bitcoin, right?

Each one is related to another one and they’re not all identical, but we do think the precedents support the idea that if you can custody one financial asset, you can probably custody any financial asset.

Laura Shin: 

And so, the letter also been made it clear that national banks can offer traditional banking services to crypto companies, and as you mentioned before this has been a long-standing problem for many of those companies, and I just wonder. 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?

Brian Brooks:

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 the 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 who’s customers want to invest in bitcoin. 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 thing is 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 signals that institutions felt safer in investing in an asset that they have custody in the bank.

Laura Shin: 

And so, in general, what would you expect to happen 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?

Brian Brooks:

Well, the first thing I think is that they’re going to be demand side effects, right, and what I mean by that is there’s a certain class of early adopter who doesn’t care if something is risky or complicated to deal with. They want it early. I’m thinking of the people who bought the first you know 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. 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 a lot of investment advisors say is a prudent allocation, they’re going to feel much safer knowing that JP Morgan is the custodian of their crypto, than feeling like the custodian is some entity, they have 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 guard rails. We know where the danger stuff is, but we also know where the safe stuff is and thus, we can activate a crypto economy within that safe zone, and you know frankly, the simple fact is we all know that markets love clarity. So, I’m not trying to be a cheerleader for the stuff, I mean some of the 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.

Laura Shin: 

And as these developments were happening, I’m sure you also saw the news about Kraken launching the first crypto bank and there’s another one that will shortly be coming on its heels from Caitlyn Long. She’s launching Avanti. Both of these came about through Wyoming’s SPDI, Special Depository Institution Regulation, and I wondered, how do you do you see these different letters that you’ve put out, and the authorities they give to, existing banks interplaying with these specific state regulations that try to help the crypto industry?

Brian Brooks:

Well, first of all, 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 to be supervised, and then to allow markets to function. So, I’m a big fan of theirs and I think 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 are some states that are a lot less friendly to crypto than Wyoming is. You know, 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 banks, and we welcome what Wyoming is up to. I think it’s terrific.

Laura Shin: 

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, national licensing regime for payment companies, which would affect many crypto companies and I wondered how would that affect things you know as you mentioned, there are some states that are less friendly towards crypto regulation. So, something like the BitLicense in New York which has been pretty unpopular in the crypto industry, how would you see it affecting that?

Brian Brooks:

Well, so, you know when I mentioned a moment ago the idea of a dual banking system, the idea of a dual banking system was that hey, there are some kinds of companies that are perfectly adequately regulated in a single state. These tend to be either smaller companies for 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 banks who 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 BitLicense 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 one platform that’s legally authorized to operate in every place, and that’s the national bank charter. 

So, you know that is our role in ecosystem. It sometimes makes bank regulators at the state level angry, and you know 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, they can do so without regard to state laws and state license 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.

Laura Shin: 

Along the same line of thinking, the conference of state bank supervisors recently announced a one company, 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?

Brian Brooks:

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 to undergo 50 different examinations every year. 

The problem with what CSBS has an announced of course, is that not all 50 states have joined. That’s the first problem, and the second problem is, is that even if you only have one exam, the source of law that you’re being examined according to, is 50 different states, you know, 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. 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’ve 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 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.

Laura Shin: 

So, as I’m sure you’re well aware. There are some people that view 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 and again, with the bank charter for fintech companies, there was a federal judge that ruled 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 the OCC will win?

Brian Brooks:

I think it is, I don’t want to jinx us, but I think it is, you know 90 plus percent likely that the OCC will win. The OCC has never lost a case in the US Supreme Court, and you know, again in the same way that one of the beauties of our federal system is that different states get to experiment with different policies, we have a judicial system that has a lower court and it has an intermediate appellate court, 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, where it was really, really controversial about whether national banks have 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 it’s 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 the 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 they’re banking customers. 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 just a species of savings account, and again that went to the US Supreme Court because it was very controversial. People fight tooth and nail. 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. There are a lot of smart district judges that make mistakes, or see it a way that is different from the way the actual law is, and you know we think the judge 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.

Laura Shin: 

In a moment, we’ll talk about stablecoins, DeFi, CBDCs and more, but first a quick word from the sponsors who make this show possible. 

Laura Shin: 

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 stablecoins, and in the stablecoin guidance, the OCC said that it allows banks to manage funds in a hosted wallet but that you are not “presently addressing the authority to support stablecoin transactions involving unhosted wallets.” 

There are some people in the industry who’ve been wondering whether this means banks supporting, or crypto companies, supporting unhosted wallets are prohibited from holding stablecoin reserves. Or the banks, you know, working with those crypto companies are prohibited from the holding stablecoin reserves. Do you have an answer to that?

Brian Brooks:

Well, Laura, I do, and I’m really glad you’re giving me an opportunity to clarify something that I know has confused some people. So, let me be super clear.  Banks are engaged in a front end part of the stablecoin transaction, and a backend part of the stablecoin transaction. We’re not asking banks to try and police every other thing that occurs in the use of the stablecoin. 

What we are saying is that when a dollar is received at the bank, in respect of a stablecoin, that transaction where the fiat comes into the bank, you know in exchange for the purchase of a tether token, or 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 stablecoin is going to a Coinbase wallet, or a Gemini wallet, or you know a Kraken wallet. Not fine for it to go to an Internet address that’s not associated with that. All right? 

What happens from there is not the bank’s issue, right. The bank, at that point, has received a dollar and it’s holding that dollar in the deposit account, but the bank needs to know who the customer was who bought that stablecoin. That person who bought the stablecoin may then go and they may use it to buy a game token, or they may use it to buy you know another crypto token or they may do whatever, and the bank is 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 stablecoin that had originally been purchased, may now want to come and redeem that stablecoin and take the dollar out of the bank account, right? That transaction also has to occur in a hosted wallet, because the bank needs to know 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 crypto land 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 bucks to, right. It’s giving the 20 bucks to the cardholder, Brian Brooks. Now, I may take that dollar and I may go to the 7-Eleven, and I may pay cash for a pack of chewing gum, and 7-Eleven may take that dollar and it might go and do something else with it, and something else, and something else, before finally that dollar makes it back into a bank account. 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 it’s working with him BSA/KYC procedures in place. That’s all. It’s really quite simple.

Laura Shin: 

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?

Brian Brooks:

Right. So normally what happens when you have a stablecoin redemption is that the person who has a stablecoin 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 stablecoin issuer mints the stablecoin, 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 fiat out off-platform, that’s called burning the stablecoin, as you know, and that stablecoin is then cryptographically canceled on the blockchain.

Laura Shin: 

And then so the bank essentially gives it to the crypto platform to give to the user?

Brian Brooks:

Correct.

Laura Shin: 

Okay. So, everybody’s been talking about DeFi, and in 2019 FinCEN released guidance for cryptocurrencies that largely said that it’s regulations apply 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, and when it comes to DeFi, do the OCC’s regulations also cover DeFi, lending, payments, et cetera, even though these are typically non-custodial services?

Brian Brooks:

So, let me try and answer that in a couple of 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. 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 company’s economic growth which is built on the foundation of banking, can be strong. 

So, coming to your specific question, the way I see all of this evolving in the world of DeFi is historically, the OCC has 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 are 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. I can sue the bank. I can shut the bank down. I can order that the bank 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 DeFi companies were originated on the platform. So, like you know ETH, for example, not that ETH is DeFi, but it’s an example of a blockchain. ETH was originated by a group of guys, and we know 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 that built 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 you don’t really apply, because you know you can say well there’s a market for 4% loans, and a market for 3% loans, 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 other 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. 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, you know deserves a Nobel prize. So, we’re going to work hard on that and see if we can put ourselves into contention.

Laura Shin: 

So, I have a couple questions. The first is around that first example that you gave, around Ethereum where you know, who created Ethereum, and so you can go talk to them, and if I talk to them, you know I kind of wonder what that means in terms of regulation 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?

Brian Brooks:

Yeah, well I mean look I don’t want to go too far 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 I’m skimming a few cents off of every transaction and transmitting that to the token holders, or something like that in a way that it is 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, 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 and 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 kind 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 is very future speculative in nature, but again the challenge we’ll have to come up with is a challenge with there is no target to go after, and yet there’s still issues occurring. How do we square that circle?

Laura Shin: 

Well, just knowing how the community tends to react to what it views as censorship, or a single point of failure, or control, I would imagine something where the government just goes in and changes things 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 of tokens and then you can vote on the different upgrades, or something like that. Do you ever see a day when the regulators might do something like that?

Brian Brooks:

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 United States doing that to be honest, but what I do envision is 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 banking system we have today, right. 

We don’t have a single Bank of the United States. What we have is JP 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 through 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. 

Laura Shin: 

So, the Federal reserve said that it is exploring a central bank digital currency, and you said you believe one should be designed by the private sector. 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 the CBDC?

Brian Brooks:

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 of 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 is going to be safe. That it really will be worth a dollar and that when the dollar is redeemed, you know, when the stablecoin is redeemed, there is a dollar somewhere to look to, to be made whole, but those products already exist and they’re growing at an asymptotic rate. 

I mean if you look at the growth rate of the major USD stable tokens, they have been basically doubling in market cap every 60 days for the last 4/5/6 months. It’s kind of astounding. If you compare that to the idea of well, what if we have a federal reserve, or some other government entity build what amounts to a stablecoin, 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 Louis and 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 is terrible at building stuff. Like when we built the space shuttle, the government didn’t build it. You know, they hired Lockheed and Martin Marietta to build it. Raytheon, right. Same thing here, 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 is there, but don’t build the tech, you know. Why would you ever do that? That’s not what the governments do well. That’s what tech does well.

Laura Shin: 

So, just to make a distinction. So, then who would be the issuer? Would it still be the central bank?

Brian Brooks:

So, listen. I think most regions are familiar with the concept of the fiat-backed stablecoin. The binding constraint on the supply of fiat-backed stablecoin, is the amount of dollars in circulation as determined by the central bank, but the stablecoins themselves are not issued by the central bank. I mean, like Circle and Coinbase issue a stablecoin, not the Federal Reserve, but that stablecoin is issued with the promise that it’s redeemable for a dollar, right. Same with all of these other fiat-backed 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 stablecoin than there are dollars in circulation, because you can’t sell the stablecoin until somebody gives you the dollar, and that’s what I’m talking about, about regulations 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 stablecoins? Government needs to tell us that. Those are the kind of rules the government does well.

Laura Shin: 

Oh, okay. So, it sounds like what you’re in favor of it isn’t actually how most people would define a central bank digital currency.

Brian Brooks:

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 are fully fungible with fiat dollars, but they can be available yesterday, and that’s the choice that we have to make. 

The analogy I sometimes give, Laura, is you know the Federal Communications Commission has jurisdiction over telecommunications. Now, we could have chosen, as a government to you 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, and they can all have different features, and they can respond to the market demands. Again, the role of the OCC in the Fed, shouldn’t be to build, at least in my opinion, it 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. You know, whoever has had a great experience with government produced product, they should raise their hand, but I think generally speaking what we like in this country, beautiful experiences that get created in this country are created in the private sector, with the government establishing rules.

Laura Shin: 

And then what role with the commercial banks play?

Brian Brooks:

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 blockchains and they could themselves be issuers, you know in the same way that Paxos gets to issue its own token, why couldn’t JP 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 side of their business. I think there’s no reason to think banks wouldn’t do that.

Laura Shin: 

I am 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 the space, and so we’ll have on one side this greater push toward adopting privacy in 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.

Brian Brooks:

Well, so this is a really complicated question, and you know where you stand depends on where you sit at a department, I would say that privacy in the US, financial privacy, you know, in the technical protocol, looks a lot different and raises a lot of different issues compared to financial privacy in some other parts of the world. So, the analogy I often give is if you are if you are a dissident in Cuba, or if you live in Venezuela, or whatever, you probably care a lot more about financial privacy in your individual transactions than we do in the US, 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 US where we are legitimately a target of terrorism every day, it feels a little bit different. Yes, there are some things we would probably rather buy privately, but as a society we seem to have made the judgment that the threat of people using our financial system for illegal 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 and 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 it could be shared with, but then there’s another side of this where 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 inter-agency 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.

Laura Shin: 

As you just referred to, US regulators do 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 wondered what you thought can or should be done to ease the frustration the industry feels with US regulators?

Brian Brooks:

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 sound that hard.

Laura Shin: 

But over what issues, in particular?

Brian Brooks:

Well, I mean look. Part of what you’re dealing with in the US government is the decentralization, ironically, of authority. So, if you went to the UK, there’re 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 more or less cover 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 commodities 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, 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 Commodity Exchange Act? You have to talk to those other regulators, and again that’s 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 get clarity. So, my promise to 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 in my jurisdiction. You’ve seen us starting on that. We have more to say, if there’s time.

Laura Shin: 

Yeah. This summer the OCC solicited requests for comment on proposed rulemaking on digital banking activities, including around cryptocurrency, and I wondered what all the different facets were of the cryptocurrency industry that these proposed rules might cover?

Brian Brooks:

Well, first of all, let me just say we were really, really gratified with the number and quality of the comments that we received from a lot of different places, including crypto trade associations, but also community groups, and consumer advocates, and you know crypto companies, be they exchange as 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? You know, 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. There are questions about custody and other things, which you’ve now seen as resolved. Then, there are questions about like deposits. Can a bank accept as a deposit, something that’s not a US dollar, and these shouldn’t be that complicated questions, but there are unsettled and raise policy issues, and so we have to think carefully about this. 

So, I can’t tell you all of the places we’ll go in response to his 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 an array of companies, and you know stay tuned, is what I would say.

Laura Shin: 

How do you think the pandemic, it’s effect on the economy, and the stimulus response, will affect the growth of the crypto industry and/or the adoption of crypto?

Brian Brooks:

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 now adays, 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 the stimulus, we have printed a lot of money, 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, and there’s supply and demand. 

So, we printed about 4 trillion dollars of new money, and depending on what happens with the 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. You know, 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 on the fiat money that we currently have in bitcoin. 

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 to bitcoin prices, because it will be seen as a better store of value, if those things were to transpire. 

Laura Shin: 

And I also wondered if you thought these factors, like the pandemic, are making regulators have a more favorable attitude toward crypto?

Brian Brooks:

Well, I don’t know. I think that the regulators’ 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 stablecoin framework, at least in draft form. You see that China has already issued the renminbi and they’re now distributing it broadly through a series of airdrops. The question is where is the US in all of us? 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. I mean, of course we have to do that, but these other countries are seeing crypto and stablecoins 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 move the country in that direction. That’s the way that I’m seeing governments think about it. Less pandemic related, more competitive related.

Laura Shin: 

Our discussion has been pretty focused on these somewhat arcane things like a different charters, or licensing regimes, 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?

Brian Brooks:

Well, look. We live in a world where a finance is fundamentally centralized. It’s centralized around banks, right. 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 gate keeper is, is a toll collector, and they get to collect tolls for everybody who wants to pass by. That means poor people who can’t afford the toll, can’t pass by. It means other people who can afford it, still get the cream skimmed off of their transaction before they’re able to do it. 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 pay 44 cents to send a letter. Now we send an email for free. That’s what crypto is about doing in the world of finance.

Laura Shin: 

All right. Great, well this is been such a wonderful conversation. Thanks so much for coming on Unchained and lest I forget, where can people learn more about you and the OCC?

Brian Brooks:

Well, the OCC is at occ.gov and people can always look up my bio on that. You can also look up occ.gov/reach, about our financial inclusion initiative, Project REACh, which I encourage everyone to support and learn more about. Laura, it’s been a great conversation, and I really appreciate you having me.

Laura Shin: 

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/c/unchainedpodcast and subscribe today. Unchained is produced by me, Laura Shin, with help from Anthony Yoon, Daniel Nuss, Bossi Baker, Shashank and the team at CLK Transcription. Thanks for listening.