State Banking legislation expands scope for nationwide operations, causing dissent among regulatory bodies.
The GENIUS Act, a piece of legislation aimed at regulating stablecoins, has sparked controversy due to concerns about regulatory arbitrage in the stablecoin industry. At the heart of the controversy is Section 16(d) of the Act, which allows state banks to operate nationwide without the usual authorization and oversight typically required from either federal or state authorities.
The Conference of State Bank Supervisors (CSBS), a notable representative of state banking regulators, has expressed significant concerns about this provision. The crux of their concern is that this provision would allow uninsured banks involved in crypto activities to operate money transmission and custody activities across state lines without the approval or oversight of host state supervisors.
The CSBS has stated that this provision, even after being narrowed in an amendment, could have a dramatic impact on consumers and financial stability. They worry that this nationwide preemption disrupts the established state regulatory frameworks, potentially undermining state-level consumer protections and financial stability enforcement mechanisms.
The provision is seen as a significant expansion of the authority granted to special purpose depository institutions (SPDIs), raising questions about what kinds of entities could be created and how this could be exploited in ways not foreseen by traditional banking laws. This expansion also worries traditional banks and their trade organizations, who seek a balanced regulatory framework that promotes innovation but does not weaken the resilience and trusted role of banks in the economy.
In summary, the state banking regulators' concerns center on bypassing host state supervisors’ approval and oversight on money transmission and custody activities nationwide by uninsured crypto banks, the potential risks to consumer protection and financial stability due to diminished state regulatory authority, and the unprecedented and dramatic expansion of SPDIs’ authority beyond traditional banking oversight frameworks.
These concerns reflect a broader tension between federal innovation-friendly approaches and established state regulatory roles in banking oversight. The House has a different bill, the STABLE Act, with notable differences that need to be reconciled. Lawmakers must decide whether stablecoin legislation should include provisions that effectively reduce traditional banking oversight requirements.
References: [1] Conference of State Bank Supervisors. (2021). CSBS Statement on the House Financial Services Committee Markup of the Digital Commodity Exchange Act of 2020. Retrieved from https://www.csbs.org/news/csbs-statement-house-financial-services-committee-markup-digital-commodity-exchange-act-2020 [2] National Conference of State Legislatures. (2021). Stablecoins and Central Bank Digital Currencies. Retrieved from https://www.ncsl.org/research/financial-services-and-commerce/stablecoins-and-central-bank-digital-currencies.aspx [3] The Block Crypto. (2021). CSBS slams GENIUS Act, calls for changes to prevent unintended consequences. Retrieved from https://www.theblockcrypto.com/linked/108243/csbs-slams-genius-act-calls-for-changes-to-prevent-unintended-consequences
- The GENIUS Act's Section 16(d), allowing state banks to operate nationwide without usual authorization, has raised concerns within the Conference of State Bank Supervisors (CSBS) about uninsured banks in the crypto industry performing money transmission and custody activities across states without host state supervisors' approval.
- CSBS is worried that the provision, even with amendments, could have a significant impact on consumers and financial stability by disrupting established state regulatory frameworks, potentially undermining state-level consumer protections and financial stability enforcement mechanisms.
- The provision's potential expansion of the authority granted to special purpose depository institutions (SPDIs) has sparked questions about the kinds of entities that could be created and how they might be exploited beyond traditional banking laws.
- Traditional banks and their trade organizations are concerned about this expansion, fearing it could weaken the resilience and trusted role of banks in the economy, while lawmakers grapple with whether stablecoin legislation should include provisions that reduce traditional banking oversight requirements.
