Op-Ed: Regulatory Innovation to Drive Economic Innovation
All human endeavors – science, music, art and sport – advance by pushing the boundaries of knowledge and improving on the past. Institutions that refuse to change and grow – often stagnate, wither in obscurity, and are ultimately replaced by institutions that embrace the universal truth: change is the only constant.
The regulatory sphere is no different. A regulatory structure that innovates in response to lessons learned from the past and changing realities will always outperform a static, staid and bureaucratic system that clings to the past with its eyes shut to the future. Importantly, the willingness and ability of regulators to innovate and modernize has positive implications for our economy. Regulation should promote a safe and sound economy that harnesses all of its productive power to drive forward, innovate and grow. To do that, the regulatory system must also continually innovate and grow to ensure that the economy is not held back by rules that are stuck in the past.
Today, bank regulators are fully engaged in an important effort to modernize the regulatory framework for large banks. This work is critical to the U.S. economy because the existing large bank regulatory framework, especially as it relates to capital, liquidity and supervision has not been materially updated in over fifteen years. Modernizing the rules to reflect real-world impact will help banks better serve businesses, households and communities across the country. Innovating and improving our regulatory system is critical because it improves our economy’s capacity to grow and thrive.
One area where bank regulation must urgently adapt to the modern era is the treatment of digital assets. The global economy is witnessing a cycle of rapid innovation in the digital asset arena. The digital asset story is still being written, but one thing is clear – bank regulation is lagging behind the speed of innovation and adoption of digital assets. While non-banks grow, innovate and continue to gain both market and mindshare in the digital asset ecosystem, bank regulation continues to be stuck in the pre-digital asset world. As a specific example, bank regulators have yet to issue clear capital rules for bank holdings of digital assets or clear rules on which types of digital assets a bank is permitted to hold.
Large banks are a hugely consequential source of financial innovation. Many of the financial innovations that people rely on everyday including ATM’s, automatic bill pay and online banking and budgeting tools, were developed in the banking sector. An outdated regulatory framework that limits U.S. banks’ ability to engage in the digital asset space will only limit the American economy’s ability to innovate and compete on the global stage of digital assets. Regulators should continue to work to find a smart and sound approach to digital assets so that U.S. banks can leverage their significant financial and technological expertise in this emerging area and provide strong consumer protections. Finally, it should be noted that sluggish adoption of smart digital asset rules for banks creates financial stability risks as most digital asset activity happens outside the highly regulated banking system. Giving banks the opportunity to better innovate in the digital asset arena is a twofer – product offerings will improve and financial stability risks will be reduced.
Just as human progress depends on adapting and building on our past, our financial system must evolve to keep pace. Today’s effort by bank regulators to modernize the bank regulatory system should be applauded and furthered. Smart regulation that meets the moment of today is a pre-condition for a sound, vibrant and growing economy that competes and wins globally.