Bankers face opportunities, risks in stablecoins, says CSBS leader

Community banks can integrate stablecoins into their operations as the emerging technology threatens to spark a deposit exodus to less-regulated nonbanks, said Conference of State Bank Supervisors President and CEO Brandon Milhorn. .Speaking April 23 during the Iowa Division of Banking Day with the Superintendent in Des Moines, Milhorn said stablecoins issuers should not be allowed to engage in bank-like activities without facing comparable regulations. He also spoke against stablecoin issuers possibly receiving interest on yields. While the GENIUS Act bans stablecoins issuers from paying interest or yield, the banking industry has said subsidiaries could skirt the prohibition. Earlier this year, the OCC proposed restricting the possibility by instituting a provision that an issuer violates the law by having affiliates or third parties pay yield to holders. Iowa Division of Banking Superintendent James Johnson predicted allowing nonbanks to have trust charters would erode trust and devalue bank charters. Last fall, Sony’s banking division filed an application with the OCC to establish a trust bank subsidiary, Connectia Trust, which would engage in crypto activities. Milhorn said he is concerned Sony and other nonbanks face fewer compliance obligations than banks. Earlier this month, the OCC conditionally approved a national trust charter for cryptocurrency exchange platform Coinbase’s subsidiary, Coinbase National Trust Co. Milhorn also sees opportunities for stablecoins to be incorporated into the traditional banking system due to the industry’s risk management expertise. The stablecoin market could increase to $3 trillion by 2030 from its current $300 billion cap, Milhorn said, potentially leading to a deposit exodus from banks. Stablecoin deposits are less likely to benefit local communities, he added. A lawyer, Milhorn once worked for the Central Intelligence Agency before joining the defense sector at Raytheon. He was named chief of staff for then-FDIC Director Jelena McWilliams in 2018. Milhorn also described the regulatory landscape banks face with examiners the Trump administration, which he described as “pro-competition moderates.” He said regulators need to undertake a cost-benefit analysis, especially as the industry is under threat from increasing funding expenses along with rising personnel and technology costs. Milhorn questioned the billions of dollars in expenses banks face in BSA/AML compliance annually. Though the BSA/AML standard is a “reasonable risk management framework,” he said examiners often enforce it much harder. He called for a shift in focus to core material financial risks and away from political considerations. “I don’t think supervision should be a tool for political change,” he added. Regulators have had an irrational fear of failure but are now more open to innovation under the Trump administration, Johnson said. Banks will need to partner with third-party vendors to adopt technology, which requires regulators to move from their current “knee-jerk reaction,” Milhorn said. Under the Trump administration, the FDIC has changed how supervisors define risk and materiality to focus less on subjective, non-financial considerations. The regulatory pendulum could swing again in a few years, Milhorn said, with examiners under a new administration adopting tougher standards while retroactively enforcing current bank practices. Though Milhorn agrees with modernizing the CAMELS regulatory rating system, he does not support eliminating the “Management” part. Though some have called for eliminating the component because of its perceived subjective nature, Milhorn sees solid leadership as crucial for long-term stability.