By Rob Nichols

As I traveled the country this summer speaking at various state bankers association conventions, I’d always ask this question of my audience: How many of you have clients and customers that are asking you about cryptocurrencies and digital assets? And nearly everywhere I went, nearly every hand would go up.

The interest in cryptocurrencies and digital assets is undeniable — even in the face of recent volatility in digital asset markets. Americans want them: from the casual dabbler to the serious investor, from Gen Z’ers to boomers, everyone it seems wants a bite at the crypto apple. Many banks want to engage, too — as digital assets become more popular, and those banks are exploring ways to meet the needs of customers who want their bank to be the custodian of these assets.

I’ve written previously about the merits of banks being able to take on custodial roles for digital assets — there are many — and the need for a regulatory architecture that will support them taking on these roles if they choose. That’s an area where the American Bankers Association (ABA) continues advocate for banks’ ability to enter the digital asset space in a safe and sound manner. But it’s just one of the debates that are currently brewing over crypto. There are several others that bankers should be aware of:

Who should regulate? One key quandary facing policymakers right now is: what’s the right way to regulate crypto, and to which agency should that authority be delegated?

Currently, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) are both vying for the role of crypto cop. Two separate bills have been introduced this summer — one by Sens. Cynthia Lummis (R-Wy.) and Kirsten Gillibrand (D-N.Y.) and another by Sens. Debbie Stabenow (D-Mich.) and John Boozman (R-Ark.) — that would delegate most of this authority to the CFTC.

Simultaneously, there are some in the crypto community who are calling for the creation of a whole new regulatory agency dedicated to digital asset supervision, though this seems far less likely. Regardless of which entity ultimately ends up with regulatory authority, it is imperative that it develops clear definitions of digital asset products that are based on the risk that each category of digital asset carries. Working with the banking agencies, any prospective crypto regulator must also ensure a level playing field between bank and non-bank entities in the digital asset markets and establish clear guidelines for risk management and consumer protection.

Payments system access? Another key question is the extent to which nonbank crypto firms should have access to the payment system. The Federal Reserve took a significant step toward answering this question in mid-August when it finalized a framework for assessing which entities may be granted payments system access. This framework creates a tiered system for evaluating incoming requests, and under it, institutions that engage in novel activities would undergo a more extensive review.

Access to the payments system is a significant privilege and comes with many responsibilities. As the Fed begins evaluating new requests for access, we’ll be watching carefully to ensure that these new guidelines are appropriately accounting for the inherent risks that come with some of these new financial players.

Is there a use case for a CBDC? Finally, there’s the question of a central bank digital currency and whether there’s a use case for it in the U.S. As ABA told policymakers in several comment letters and testimonies over the last year, our view is that no such case exists — for every problem that proponents say a CBDC could solve, the fact is that there are already solutions available that don’t involve a government-created currency. Financial inclusion is just one example: Banks are already making great strides to bring more unbanked households into the financial system by offering Bank On-certified accounts.

Not only would a CBDC be duplicative of private-sector solutions that already exist, but it also has the potential to have an incredibly damaging effect on bank balance sheets and the flow of credit to households and businesses if the Federal Reserve were to become a competitor for bank deposits. All of these ongoing debates underscore an urgent need for a fair, well-calibrated regulatory framework for digital assets — one that promotes responsible innovation while minimizing systemic risk and protecting consumers. And that’s a framework we’ll continue to fight for.

Nichols is president and CEO of the American Bankers Association

Cryptocurrency is currently an unregulated, speculative investment

By Hannah Flanders

With the increasing rise in popularity of cryptocurrency throughout the U.S., it is no question that banks and regulators alike aim to understand this unique form of encrypted exchange while also helping to protect the millions of individuals who have already invested in, traded, or used digital assets.

In May, crypto investors experienced the most severe price crash the global crypto market has ever seen. As inflation rises and individuals continue to draw what money they have left out of the market, prices continue to drop each day.

Cryptocurrency is a speculative investment for both banks and individuals engaging with it, and currently, there are no specific regulations tailored to it. As the market this last year has shown, although the market experiences rapid unpredictability and growing connections to money laundering activity, consumers and business alike continue to be interested in the potential benefits of this transferable wealth.

In this, many regulators are attempting to harness the security of financial institutions that are entering into the untamed landscape. As agencies — including the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) — jockey to assert regulatory authority and supervision over digital assets, it is important for banks and their counsel to consider that no regulations have been established regarding bank involvement with digital assets.

In March 2022, President Joe Biden issued an Executive Order regarding the need to establish consumer/investor protection and focus on financial stability, inclusion, and preventing against illicit activity within the American crypto market. Of this came an increase in guidance issued by several national agencies.

Guidance by the Federal Deposit Insurance Corporation (FDIC) states that all FDIC-supervised institutions that intend to engage in, or that are currently engaged in, any activities involving or related to digital assets should notify the FDIC. This action aims to provide supervisory feedback in the wake of activities that pose significant safety and soundness risks as well as financial stability concerns to banks. Additionally, the Office of the Comptroller of the Currency (OCC) advises that banks should not engage in cryptocurrency until they have notified their supervisory office and received a non-objection form.

The Financial Crimes Enforcement Network (FinCEN) has also issued several advisories to banks regarding illicit activity involving cryptocurrency. Banks should demonstrate compliance with their anti-money laundering (AML) programs and be aware of the prevalence of unregistered entities without sufficient AML controls. As with every new relationship, banks are advised to also consider the Bank Secrecy Act of 1970 (BSA) when engaging with digital assets.

In addition to guidance from federal agencies, banks should also be aware that state agencies and legislators may also begin acting on Biden’s order. In this, more proposed legislation to encourage innovation in the financial sector while also enforcing consumer protections may begin appearing at both the state and federal levels.

Currently, only one legislative act has been proposed at the federal level by U.S. Senators Kirsten Gillibrand (D-N.Y.) and Cynthia Lummis (R-Wyo.). If enacted, the Responsible Financial Innovation Act (RFI) would establish regulatory framework for digital assets by providing industry and regulator clarity, clarifying standards, establishing jurisdictional boundaries, and protecting consumers.

At the state level, Wisconsin’s Department of Financial Institutions (DFI) and Department of Agriculture, Trade, and Consumer Protection (DATCP) have cautioned Wisconsin banks and consumers of the risks of crypto. While no legislation has yet to be proposed or passed, Wisconsin bankers should expect that — like many other states — state regulation may be forthcoming.

For questions on legal developments or regulations related to crypto or other compliance matters, please reach out to WBA legal at 608-441-1200.

*Update from originally published article: On Tuesday, August 16, guidance was issued for Federal Reserve System (FRB)-supervised banking organizations engaged in or seeking to engage in crypto-asset-related activities. The guidance includes the instruction that a banking organization need notify its lead FRB supervisory point of contact regarding such activities.

FDIC-supervised banks must now report digital asset ventures

By Scott Birrenkott

Q: Is a Financial Institution Required to Notify Its Regulator When Engaging in Activities Involving Crypto Assets?

A: Yes. FDIC-supervised institutions are required to provide notification, along with certain information, when engaged in any activities involving crypto assets (digital assets). In turn, the FDIC reviews this information to provide relevant supervisory feedback.

While this requirement applies to FDIC-supervised institutions, non-FDIC supervised institutions should still consider proactively working with their prudential federal regulator. As innovations in the space of digital assets continue to develop, and financial institutions explore new relationships, working directly with your regulator is an important step to understanding compliance expectations. Digital assets present potentially unique safety and soundness risks, as well as financial stability concerns, and consumer protection considerations. The FDIC intends to review information provided in order to work with the financial institution engaged in digital asset activities as appropriate.

Wisconsin Department of Financial Institutions (DFI) is also considering digital asset activity. While there are currently no specific Wisconsin requirements or notification requirements, Wisconsin financial institutions should still consider working proactively with the DFI when engaged in digital assets. While both state and federal regulators support innovations, this is an area that is rapidly evolving, and often misunderstood. Transparent communications between financial institutions and their regulators can help address any potential compliance or safety and soundness concerns.

The new FDIC notice requirements can be found under Section 39 of the Federal Deposit Insurance Act, 12 CFR Part 364.

By Tom Still, WTC President

The list of economic uncertainties for 2022 is long and complex, with COVID-19 variants, supply chain woes, energy disruptions, climate-change anxieties, and political frictions around the world producing jittery markets.

It’s time to look for trends in technology to calm frazzled nerves on Wall Street as well as Wisconsin’s Main Streets.

Analysts at International Data Corp., the global market intelligence firm, predict the technology industry is on track to exceed $5.3 trillion in 2022 — thus returning to the 5% to 6% annual growth rate typical before the pandemic. The United States is the world’s largest tech market, representing about a third of the projected total at $1.8 trillion.

Tech overcame the 2020 speed bump precisely because COVID-19 triggered so much change. The workplaces of today are no longer easily defined. Changes in business travel forced innovation. Cybersecurity threats led to more investment across industry lines, from financial services to “Mom and Pop” retailers. Phrases such as “quantum computing,” “virtual reality,” and “artificial intelligence” were once the exclusive lingo of computer scientists; today, they’re part of the business plans for many companies.

It all points to bigger tech budgets, greater investment and more innovation pushing through the economic super-structure.

Technology will continue to disrupt many verticals. Health care is being transformed through telemedicine and wearables, not to mention breakthroughs in diagnostics and therapeutics. The jury is out on how effective remote learning has been for students of all ages, but online education will continue to have a role in the classroom. Sales through eCommerce in the United States continue to soar (hence, some of today’s supply chain troubles) and trends such as cryptocurrency are altering the financial world.

Tech can help slow climate change effects through conservation controls in homes, offices, cities, and power plants, even if “crypto-mining” has become an energy vampire. Likewise, as technology displaces many people in the workforce, it will create more new jobs than it destroys. The trick is ensuring that people are trained to do the work and opportunities don’t bypass women and minorities.

There are some threats to U.S. tech sectors, but also opportunities for Wisconsin to grow as a tech-savvy state.

In Washington, D.C., Congress should establish data privacy rules that are national in scope versus a state-by-state approach that could hamper companies engaged in eCommerce, finance, or insurance. Congress should avoid unnecessary taxes on venture capital managers and not pass an antitrust bill that would shut down “exit” options for young companies.

Congressional consensus around bipartisan plans to invest federal dollars in key research areas could help Wisconsin, especially if the state’s research universities and private partners can compete for one or more R&D “hubs” envisioned through the National Science Foundation.

In the Wisconsin Legislature, the refining of the state’s investor tax-credit law will lead to more angel and venture capital dollars flowing into young companies. When the Qualified New Business Venture law took effect in 2005, angel and venture capital investments could be measured in the tens of millions of dollars. The 2021 total will easily exceed $500 million, in part because those credits are pulling four times their weight in private investment. Pending bills would improve the law.

The new year may be tumultuous in many ways, but growth in tech markets could help smooth choppy waters.

The Wisconsin Technology Council is the independent, non-partisan science and technology advisor to the governor and the Legislature.

By Paul Gores

In a prominent spot near the center of Brookfield Square mall, an automated kiosk quietly invites shoppers to insert cash and buy Bitcoin, Litecoin, or Ethereum cryptocurrencies.

Similar cryptocurrency kiosks — commonly called crypto ATMs or Bitcoin ATMs — can be found in other major Wisconsin malls, as well as in hundreds of convenience stores, gas stations, and retail shops around the state.

At the same time, a cryptocurrency-buying option now is available throughout Wisconsin at many kiosks operated by the self-service coin-cashing company Coinstar — 146 of them in all in the Badger State.

As cryptocurrencies and their enabling technology — blockchain — grow in acceptance and popularity, more and more kiosks that make Bitcoin, Litecoin, and other currencies available to the masses are popping up around the state and nation. There are now more than 35,000 crypto kiosks or ATMs in the U.S. offering people interested in owning the digital currency an easy way to acquire it. In Wisconsin, there are believed to be more than 500 such machines.

The buildup of crypto ATMs — and decentralized currencies operating on blockchain in general — raises questions for American financial institutions whose business traditionally has revolved around a currency with a central authority.

In the short term, bankers shouldn’t worry that cryptocurrencies are about to overtake the dollar to the point where trips to the grocery store routinely will be paid with Bitcoin, one expert said.

“We’re nowhere close to grandpa buying milk with a tiny, tiny, tiny fraction of a Bitcoin,” said computer science professor, Michael Litman, of Concordia University Wisconsin in Mequon.

Still, more companies are accepting payment in cryptocurrency, and nowadays even a wealthy donor might ask whether his or her favored charity will accept a contribution in Bitcoin. Given crypto’s momentum, bankers would be wise to learn as much as they can about cryptocurrency and consider how it could be useful to their customers, experts say.

Cryptocurrencies are here to stay, with a total market value in excess of $2 trillion and more than 200 million users across the globe, said David Krause, director of applied investment management and associate professor of finance at Marquette University in Milwaukee.

Krause said when it comes to cryptocurrency, banks should think of themselves like taxi companies before Uber, or bookstores before Amazon.

“They need to innovate and adopt digital currencies to avoid being run over,” Krause said.

The rise in crypto ATMs coincides with the interest in cryptocurrencies, particularly Bitcoin, which, while volatile, has seen its market price skyrocket over the past few years. Kiosks or ATMs offer average people access to owning Bitcoin or other digital currencies as an investment, or, if they use a vendor that accepts Bitcoin, to easily acquire Bitcoin to make a purchase.

“Coinstar and the Bitcoin kiosk industry generally serve consumers who prefer to budget or manage their funds in cash yet still need access to digital financial products like cryptocurrency,” said Michael Jack, head of product for Coinstar. “There are a variety of use cases. Consumers use cryptocurrencies to invest or save and buy and hold them in a wallet. Others use it as a form of person-to-person or person-to-business transfers. In many cases, cryptocurrency can be an easier and/or more cost-effective way to do those transactions.”

Last fall, Walmart said it had started a pilot program with Coinstar to put crypto-enabled Coinstar kiosks in 200 stores of the nation’s largest retailer. If the pilot is successful and expands to other Walmart stores, the ability to buy cryptocurrency in so many locations could go a long way toward mainstreaming the digital currency.

While some crypto ATMs allow a currency such as Bitcoin to be sold and converted to cash, most transactions at the ATMs involve a customer inserting cash and having an equal amount of Bitcoin at that day’s market price — minus fees — deposited in the buyer’s digital wallet. In the case of Bitcoin, which at the time of writing this was valued at about $48,000, even $1,000 inserted into the ATM would buy only a small fraction.

“There is growing adoption of cryptocurrency, primarily as a speculative investment,” said Scott Green, of Shazam Network-ITS Inc. “While Bitcoin can be used for person-to-person transfers or purchases from retailers that support it, the most prevalent use case is investment.”

However, even though cryptocurrency might not be well-suited for smaller financial transactions yet, it can make sense for larger deals, said Concordia’s Litman. Litman, who has owned and sold Bitcoin, is a fan of some NFTs, or non-fungible tokens, which also are powered by the blockchain.

NFTs are used as a way to validate ownership of something unique, the way, say, a title registered with the Department of Motor Vehicles shows who bought a car. An NFT can do the same thing, except it’s verified by the blockchain for proof of ownership.

“I would actually make the argument that in some ways banks should be embracing this,” Litman said.

Litman also said using NFTs can cut the red tape and expense of international transactions. For instance, $100,000 in U.S. dollars could be converted to an NFT such as Ripple, sent via blockchain to a Ripple digital wallet in China, and then converted into the yuan.

Using a crypto ATM comes at a cost to the user. A commission typically is charged, along with a flat fee. Fees range widely depending on which company operates the ATM.

For example, each cryptocurrency purchase at a Coinstar kiosk carries a transaction fee of 4% and a cash exchange fee of 7%.

Bitcoin Depot, which runs the crypto ATMs at Brookfield Square and other Wisconsin malls, allows for daily purchases of from $20 to $15,000 of cryptocurrency.

Retailers who provide space for cryptocurrency ATMs do so for the reason they host other types of automated kiosks or services — mostly for the rent.

“Adding this service provides an additional revenue stream to the retailer,” said Coinstar’s Jack. “It also brings more consumers into their establishment who are then more likely to spend money in the store.”

Jack said rents vary between providers and retailers, and can encompass either a flat rent and/or a revenue share.

“For Coinstar retailers, it is a service offered on an existing kiosk with no additional space or labor required by the retailer,” he noted.

On its website, Coin ATM Radar puts the number of cryptocurrency kiosks in Wisconsin at 416, although that appears not to include the nearly 150 Coinstar kiosks offering a crypto function.

Among other crypto ATM operators in Wisconsin are Digitalmint, Athena, and CoinFlip.

As of now, crypto ATMs are not regulated by the Wisconsin Department of Financial Institutions. But as locations and usage grows, they could face increasing scrutiny by state and federal regulators.

CNBC reported in November that as the number of crypto ATMs in the U.S. has grown, criminals increasingly have used the machines in schemes including money laundering and drug trafficking.

The CNC report said the ease of transactions and relative anonymity allowed when using them has contributed to abuses of the ATMs, and that some in the industry are pushing for uniform standards to prevent crime amid a patchwork of rules and state laws.

Experts generally believe some kind of regulation is coming for cryptocurrencies.

“I do expect more regulation over time. But regulation focused on cutting off fraud should and hopefully will be first and foremost,” said Joseph Wall, associate professor of accounting at Marquette University.

Litman said some attempt to regulate cryptocurrency is likely, but it might not be easy.

“Yes, the government is going to want to step in and do it. With blockchain, because of the nature of it, it’s going to be very difficult. Who are they going to hold accountable?” he said.

Shazam’s Green said that to some extent, there are regulations and statutes that apply to cryptocurrency, but the enforcement is difficult due to the nature of decentralized finance.

“For example, Bitcoin as a crypto should roughly follow commodities laws, and tokens that look like securities should fall under securities laws,” Green said. “The regulatory environment around the entire crypto, DeFi (decentralized finance), and stable coin industry is in flux, but we are starting to get more clarity by the day. Also, as banks start delving into it more, they will be seeking guidance and approval of regulators for their projects, and that will help clarify ambiguities.”

Should banks become involved in offering customers crypto options or even crypto ATMs?

“It would make a lot of sense to offer a platform like an ATM, but one that can do more,” said Marquette’s Wall, an expert in blockchain and related technologies. “A bank that wants to increase its customer base and service its customers based on their needs should consider multiple ways that their customers may want to store their wealth, conduct transactions, and interact with their mediums of exchange. ATMs are one way to do this. Increasing the ability of a customer to transact, transfer, and use their chosen medium of exchange is the very basis of banking, starting with the barter system. I cannot imagine a bank believing that U.S. dollars only is a permanently sustainable business model.”

Green said there’s not a need for banks to rush into crypto ATMs.

“Banks don’t need to do anything to allow customers to purchase and use cryptocurrency. The debit cards, ACH, and new faster payment gateways will all help facilitate fiat-to-crypto conversions for customers when they’re using any third-party service such as an exchange,” Green said. “A question banks may start asking is what else can we do directly ourselves that provides value and earns revenue? For example, rather than ATMs, the digital banking platforms that banks have provide a much more flexible, efficient, and convenient interface to buy and sell crypto.”
Marquette’s Krause doesn’t particularly like the idea of banks adding crypto ATMs.

“Bitcoin and crypto ATMs can be convenient for investors and consumers, but I am not a fan,” Krause said. “They tend to have high transaction fees, they are not widely available, and like most ATMs, they often have technical problems. I think bankers have a lot more to worry about than crypto ATMs!”

Regardless of how much crypto ATMs proliferate, banks should be paying attention to cryptocurrencies, experts said.

Wall said decentralized financial models are one of the greatest threats to traditional banking in a long time.

“I have seen studies that suggest it can cost more for a poor person to send money to and from other relatives in other economically impoverished areas than it did 30 years ago,” Wall said. “This should not be. Cryptocurrencies can be an equalizer by slashing rates and making costs proportional for all. The speed, execution, immutability, and cost structure are such that it is understandable why the market capitalization of DeFi companies is already rivaling that of traditional banks.”

There are ways for banks to work with cryptocurrencies, and they need to look into them, Wall said.

“Some banks will likely create their own cryptocurrencies, embrace the use of a Fedcoin should one be created, or partner with traditional cryptocurrencies to hedge their risks in the space,” Wall said. “Those banks which do so will likely experience a reduction of profitability in percentage terms, but an increase in the number of transactions such that overall profitability may increase, depending on their creativity.”

Wall said banks that ignore the sector are likely establishing a profitability maximum this year.

“They will likely still be able to grow for a while, but the gap between their rate of growth and the potential growth they could have — by embracing cryptocurrencies — will begin to widen at an increasing rate,” Wall said. “It is not that banks are going away. The business models they employ are rapidly changing. Those that adapt can still do well. Those that do not will struggle.”

Gores is a journalist who covered business news for the Milwaukee Journal Sentinel for 20 years.

SHAZAM® is a WBA Gold Associate Member.