The FDIC’s current approach to blockchain and distributed ledger technology has “significant downsides,” said Vice Chair Travis Hill in a March 12 speech.
In 2022, the FDIC established that banks must individually engage with their regulator before beginning digital asset activities. The agency clarified that included crypto and any bank “participating in blockchain- and distributed ledger-based settlement or payment systems.”
Hill said the guidance has contributed to the belief that the FDIC “is closed for business if institutions are interested in anything related to blockchain or distributed ledger technology.” He called on regulators to provide applicants “as much clarity as is feasible” regarding permissible activities.
Hill described tokenization as separate from cryptocurrencies while still representing commercial bank deposits, money market fund shares, government and corporate bonds, gold and other commodities along with real estate. “It would be helpful to provide certainty that deposits are deposits, regardless of the technology or recordkeeping deployed, and if there are reasons to distinguish some or all tokenized deposits from traditional deposits for any regulatory, reporting, or other purpose, the FDIC should, following an opportunity for public comment, explain how and why,” Hill added.
“And finally, the agencies need to distinguish between ‘crypto’ and the use by banks of blockchain and distributed ledger technologies. I do not think banks interested in the latter, insofar as it simply represents a new way of recording ownership and transferring value, should need to go through the same gauntlet as banks interested in crypto.”
Hill is optimistic that tokenization and distributed ledger technology can overcome the obstacles posed by “slow and inefficient” payment systems, which are currently plagued with delayed settlements for cross-border transactions and bond issuances.
“Tokenization offers much more than just a shiny version of Zelle or Venmo,” Hill added. “In particular, it offers programmability, the ability to hard-wire on the ledger future transfers of value that automatically self-execute based on the occurrence of future conditions; atomic settlement, or the simultaneous exchange and settlement of payment and deliver, including multiple parties; and immutability of the shared ledge that can serve as a transaction record and reliable audit trail.”