The second big change in the industry is the decentralization of finance, or DeFi. Powered by distributed ledger technology, this change “could be tectonic in scale,” Brooks said. “Blockchain is to financial services what the internet was to libraries and post offices. Regulators and incumbent service providers — all of them — need to get ahead of this or be relegated to economic history.”
About 60 million Americans now own some form of cryptocurrency, and a quarter of institutional investors have some in their portfolios. Financial regulators are spooked by cryptocurrency because it’s disconnected from central banks and not easy to control. Still, regulators “can’t ignore the increasingly important role of crypto in the world of finance,” Brooks said.
Blockchain is fundamentally a banking technology, he said: It records transactions and enables the exchange of value just like banks, except it does so instantaneously and more efficiently. It can reduce costs of financial services such as mortgage origination fees, lowering closing costs for homebuyers.
Banks and other financial services are exploring the ways blockchain might be used to power payments and back-office operations. Meanwhile, some fintechs have been deciding that they’d like to become banks, buy banks or partner with banks — and it’s all happening with little regulatory clarity. With a few exceptions, cryptocurrency is regulated by states, not the federal government, which is a big challenge for businesses trying to work with cryptocurrency.
Brooks argued that “companies engaged in banking through new and innovative means” should be able to apply for national bank charters, just like incumbent banks. This would allow fintechs to operate as banks and work within the same regulatory structure.
“The uniform application of supervision levels the playing field, it doesn’t distort it,” he said.
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