Comment Letter - Office of the Comptroller of the Currency: Warning of the Dangers Posed by the Shadow Payment System and Shadow Digital Money

Abstract

This comment letter was submitted in response to the Office of the Comptroller of the Currency (OCC) advance notice of proposed rule-making regarding the digital activities of National Banks and Savings Associations. For the reasons set out in this letter, we believe that the OCC’s proposed approach to regulating new financial technologies, institutions, and platforms is fundamentally flawed. Rather than focus on relaxing the regulatory framework governing banks, we believe that the OCC should consider how to strengthen the legal regime governing an emerging contingent of non-bank financial institutions that now compete with banks in the realm of money and payments. This comment letter describes the business models of these new institutions, the antiquated and inadequate legal regimes that currently govern them, and the serious and growing risks they pose. This letter suggests modest and straightforward reforms that the OCC should recommend to Congress that would require these firms to back their monetary liabilities 1:1 with bank deposits. These reforms would harmonize state and federal law, prevent a weakening of the prudential safeguards that ensure the safety and soundness of money institutions, and yet still allow both banks and non-bank payment platforms to offer innovative services. These reforms would also be superior to alternative approaches such as a federal payments charter, which would likely prompt a dangerous race to the bottom between state and federal regulators.

Keywords: Bank Regulation; Financial Institutions; Monetary Institutions; Deposit Taking; Shadow Payment System; Shadow Digital Money; Money Services Businesses

JEL Classification: G2, G23, K2