Talking Crypto Custody; Climate Rule's Legal Perils; Overdraft Fees; Capital Complaints
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In a short week, the biggest news (at least in financial regulation) centered on opposition to the Fed-led Basel endgame plan. The proposed capital hike has Wall Street up in arms. But some of the central bank’s governors and influential Democrats aren’t thrilled either. On a more understandable policy topic, the CFPB initiated a new effort to significantly lower bank overdraft fees. The industry isn’t going to take that lying down. Meanwhile on Capitol Hill, the House Financial Services Committee pointedly reminded SEC Chair Gary Gensler about the legal uncertainty his long pending climate rule faces. For our Friday interview, we sat down with the CEO of the only crypto bank that is overseen by the OCC.
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Friday Q and A: Crypto started the year on a high note when the SEC finally approved Bitcoin ETFs. Investors have poured money into the funds, run mostly by big, well-known asset managers. So maybe all the hype was justified.
But in the policy arena, digital assets are still very much stuck in place. Legislation in Congress is going nowhere fast. And at the SEC, enforcement – rather than new rules – remains at the forefront. Looking to pierce through the mostly cloudy outlook, we sat down recently with Nathan McCauley.
The co-founder and CEO of Anchorage Digital is a security engineer who used those skills to build a platform that provides custody services for institutional investors. He knows a lot about regulation, too, because Anchorage has the first (and only) federally chartered crypto bank – supervised by the OCC. The experience has given him a decidedly different take on the oversight debates. Read on to learn his thoughts on federal regulators, the new ETFs and the SEC’s controversial safeguarding rule. What follows is our (lightly edited and condensed) conversation.
Capitol Account: What did you think of the Bitcoin ETF launches?
Nathan McCauley: There's always been this notion of, what is it going to take for Bitcoin, and crypto more generally, to institutionalize? The ETF wrapper makes it so much more simple and accessible for a broader set of people – particularly people that are interested in the price appreciation part of it, but don't want to take on the complexity of custody and trading…So, a pretty, pretty huge breakthrough. To go from a wild idea 15 years ago to where it is now, with an ETF, it's really a testament to the whole space.
CA: What role does custody play?
NM: If you have an ETF that's, say, gold, there is in fact somebody that is holding the gold, literally – it's in a warehouse somewhere. It's the same story with a Bitcoin ETF, the assets must be held at a custodian. There's a lot of regulatory structure that goes into both how it's stored and how it's acquired, to make sure that everything is above board.
CA: Right now almost all of the new Bitcoin funds use Coinbase as the custodian. How do you see Anchorage fitting in?
NM: We are deeply engaged with all of the issuers. The issuers so far have been pretty reticent to add custodians, or to change custodians – for entirely reasonable reasons. They have wanted to simplify the flows and they have wanted to unify their fact patterns. They all settled on a single solution and basically all applied with the same set of facts…The important point though, I think, is that all of them recognize that over time custodian diversification is going to be a super important point for them. And they really appreciate the fact that we have a national bank charter.
CA: We don’t hear about a lot of companies in your industry wanting to be regulated. How did you go down that path?
NM: In late 2017, it started becoming clear that cryptocurrency was going to be more than just a single asset, Bitcoin. Ethereum got pretty popular, and a lot of what was previously just fun retail speculation…started to become more interesting to institutions that wanted to come into the digital asset space. My co-founder and I saw that there was an opportunity.
CA: What do these big firms like hedge and mutual funds want before trading crypto?
NM: Institutions needed two things. They needed fundamentally better technology than existed at the time. And they needed the whole thing to be regulated…There was no one who was trying to be a qualified custodian. No one was trying to pursue state licensure, to say nothing of federal licensure, at the time.
CA: The OCC signed off on your charter in the final days of the Trump presidency, and the agency hasn’t approved any more crypto banks since. Are Biden’s Democratic regulators more skeptical of digital assets?
NM: The previous administration was interested in what I would call trailblazing – let's get some of these things through, let’s look at this and take an approach to get things going. The current administration is more focused on scale, resilience and integration into the system. I wouldn't necessarily characterize it as skepticism. Some individuals might express some skepticism here or there, but the overall trend has been: It's here to stay, what do we actually do in order to make this work?
CA: What does having the charter mean for Anchorage?
NM: We have a fiduciary obligation to the clients, and are overseen by very careful and thoughtful federal regulators.
CA: The OCC treats you like any other bank?
NM: It's pretty all encompassing…The OCC examiners come in and assess capital, liquidity, [anti-money laundering] programs, operational risk, management structure, business continuity planning – really the entire scope of what it means to operate as an institution.
CA: There seems to be a broad sense in the crypto industry that regulators don’t understand the technology, and that more rules and oversight will only stifle the innovation. What do you think?
NM: When I meet with federal regulators, these are careful, thoughtful and on-point people who understand the implications of what they're doing. Generally, I find our financial regulators to be highly, highly competent.
CA: Why does there seem to be such a deadlock in Washington when it comes to setting policy for digital assets?
NM: The crypto industry is building infrastructure that has potential to be transformative – for the way technology works, the way ownership of technology works, the way that consumers interact with that technology. Unfortunately, we've only gotten to the infrastructure phase…As we get more and more real-life use cases, it will be more clear the kind of benefits that we are bringing to the overall ecosystem. That will help policy makers, regulators and legislators have a better framing for what is going on. When you're just at the infrastructure layer, things are so abstract…(Friday)
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Legal Woes: Though there are plenty of strongly held opinions about the SEC’s climate disclosure plan, few disagree that it will face a lawsuit. So the theme of Thursday’s House Financial Services oversight subcommittee hearing – “a future of legal hurdles” – was particularly apt. That doesn’t mean, however, that the panel broke a lot of new ground in its examination of the long-pending proposal. Instead, the session turned out pretty much how one would expect.
Republicans castigated the plan, highlighting the burdens it could place on small businesses and farmers. The SEC chair’s relentless rulemaking was frequently brought up as well, even if it was a bit off-topic. “We’ve got a Gary Gensler problem,” Warren Davidson asserted at one point. “We already have the world’s best capital markets…The only thing we can do is mess them up – and Gary is giving it a really serious effort.”
Democrats were supportive of the climate rule, pointing out that investors deserve to know how global warming and extreme weather are affecting public companies. “Today’s hearing is but another assault on helpful investor protection,” the ranking member, Al Green, concluded.
The only thing that both sides readily agreed on was the importance of farmers – perhaps because the panel’s chairman, Bill Huizenga, brought one in from his district to testify. (The appearance was even previewed in the local news.)
Still, Bill Schultz, whose family grows peaches, apples, grapes and cherries on 300 acres in Michigan, wasn’t exactly definitive on how the regulation would hit his business. “I fear the SEC’s rule could put our industry at risk,” he said, singling out its so-called scope 3 requirement that firms report on the emissions in their supply chains. “I expect most family farms in America will be touched by this proposal.”
Democrat Juan Vargas, who said that he lived on a chicken farm and worked in a nursery while growing up, wasn’t exactly buying it. “You have a very compelling story,” Vargas told Schultz. “How is this impacting you? Because it doesn’t seem like the public is invested in your farm.”
Schultz allowed that he wasn’t totally sure. “That’s, I think, part of the reason for the hearing today,” he said. “There might need to be some clarity as to what that might look like on the scope 3 component – because it's a little bit maybe not clear at this point in time.”
Huizenga stressed that the hearing wasn’t intended to be a debate on climate change, but rather an examination of whether the securities regulator has the legal authority to require the disclosures. And, he argued, the answer is clearly `no.’ “Nearly a century ago, Congress created the SEC to protect investors, maintain fair, orderly and efficient markets and facilitate capital formation…not to necessarily advance a particular agenda.”…(Thursday)
Overdraft Blitz: The CFPB and progressive Democrats, most prominently Sen. Elizabeth Warren, have led an assault on overdraft fees in recent years. The campaign has been pretty successful: penalties have fallen to an estimated $9 billion in 2022, from $12 billion three years earlier. Notably, that’s been accomplished largely by naming and shaming the banks that collect the most. But now the consumer agency is ratcheting up the effort – and stoking a major fight with the industry – by proposing a rule that the bureau predicts could cut firms’ overdraft revenue by at least another $3.5 billion annually.
Director Rohit Chopra, as he often does, sought to gain maximum political impact from the announcement. On a Tuesday press call, he framed the plan as part of the White House’s broader war on hidden consumer charges, calling overdrafts a “junk fee harvesting machine.” National Economic Council Director Lael Brainard, who also joined the session, compared the proposal to the administration’s push to lower prices for insulin and high-speed internet service.
Banks, however, contend that the restrictions will be disastrous for consumers because they essentially eliminates a form of credit that countless people rely on for emergency expenses, such as paying the rent. “The CFPB is effectively proposing to take away overdraft protection from consumers who want and need it,” said American Bankers Association President Rob Nichols.
Not surprisingly, the industry is also pointing to what it considers to be significant legal shortcomings in the bureau’s rulemaking. They include a failure to assess how the rule would affect smaller lenders and ignoring legislative prohibitions on capping overdraft fees. While it’s very early days, these are the kinds of arguments that could end up in a lawsuit.
One reason why overdraft fees are spurring a big fight is because there’s lots of money at stake. Banks, according to the CFPB, typically charge customers $35 when they withdraw more money than is available in their accounts. About 23 million households pay the penalties each year. Here’s how the agency is trying to bring the fees down in its rule, which would apply only to firms with more than $10 billion of assets:
The proposal would close what the bureau calls “an outdated loophole” stemming from the late 1960s that exempts overdraft charges from the Truth in Lending Act. As a result, the fees come with limited consumer protections and banks aren’t required to provide robust disclosures that would enable comparisons with interest rates on other types of loans, the CFPB says.
If banks chose to keep offering accounts with overdraft charges, they could only assess a “breakeven fee” that allows them to recoup the costs and losses. (Most losses are incurred when firms write off overdrawn accounts that never return to a positive balance.)
As an alternative to the breakeven fee, banks could charge a “benchmark” penalty that would be set by the CFPB. In its rule, the regulator has proposed several options, including $3, $6, $7 or $14. ..(Wednesday)
Bombarded on Basel: Almost from the day it was issued by bank regulators last summer, the industry has been waging a multi-front campaign against the Basel endgame plan. Firms and their D.C. advocates have spared little expense, lobbying lawmakers, running television ads and hiring prominent lawyers to telegraph the inevitable lawsuit. Now, the frenzy shifts to a more staid but ultimately much more important arena: the Fed, FDIC and OCC – the agencies that will make adjustments to the rule and (presumably) vote to adopt it in the coming months.
That’s not to say the lengthy comment letters filed at the deadline Tuesday aren’t full of bluster, legal threats and doomsday scenarios – they are. “The proposal is the most radical transformation in bank regulation in the last decade,” the American Bankers Association and Bank Policy Institute write. “The current banking model,” the groups add, “is not broken, but the proposal creates a risk of breakage.” And the Financial Services Forum underscores that the capital boost will cause a $100 billion hit to the economy – annually.
The opponents point out that banks have tripled their capital levels since the financial crisis and weathered numerous tests, such as the pandemic and the recent geopolitical turmoil. The largest firms in particular, they say, were a source of strength in the system during last year’s regional bank crisis. The proposal is “at war with reality,” BPI President Greg Baer told reporters on a call…(Tuesday)
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