Director of the Office of the Comptroller of the U.S. Currency: DeFi-driven “self-driving banks” will become mainstream earlier than “self-driving cars”

In November 2020, the outgoing U.S. President Trump nominated Brian Brooks as the director of the U.S. Office of the Audit of the Currency (OCC) for a term of 5 years. Brian Brooks was a former bank executive and worked as the general counsel of Coinbase for a period of time. He is also an advocate of crypto-friendly reforms and has said that banks can provide crypto custody services.

In 1962, “Popular Science” magazine published an article in which it was envisaged that there would be self-driving cars in the future-as a result, reality came earlier than anyone expected. For road traffic safety regulators, they have not yet come. And adapt to industry changes, the era of autonomous vehicles has arrived.

Most of the current automotive laws and regulations are limited to speed limits, signalling, drinking and driving, etc. They are basically designed to prevent potentially dangerous drivers, not potentially dangerous cars. However, self-driving cars bring new risks, which have never been considered in traditional legal rules. Just as a question posed by the well-known technology media “Connect” before:

“Who is monitoring self-driving cars? Basically, no one.”

Similarly, banking is also moving forward. A new business model driven by decentralized finance (DeFi) technology has emerged, but just as the traffic industry regulators initially set road laws and rules only to protect them from drivers, the current banking regulatory laws and regulations are mainly to prevent human activities. fault.

In the Office of the Office of the Comptroller of the Currency, we require every bank to set up management personnel responsible for compliance and security, such as chief risk officer and chief audit executive officer; we limit the amount of loans that banks can provide to their senior executives; we even Some bank employees will be allowed to “rotate their jobs” so that others can sit at their desks to identify potential fraud. Although we call these measures bank supervision, they are actually supervising banks.

However, DeFi reversed everything. Using blockchain technology, DeFi can provide financial services without manual intervention. For example, using an interest rate based on an algorithm based on supply and demand can create a currency market, but in traditional banks, setting interest rates usually needs to be implemented by a dedicated interest rate committee. In addition, there are many other DeFi projects, including:

Decentralized transactions;

Allow users to trade without a broker;

The loan contract agreement can be executed without the involvement of a loan officer or a credit committee.

Although these “self-driving banks” have not been born for a long time, they are not small in scale. Such banks are likely to become mainstream before self-driving cars begin to become popular.

However, “self-driving banks” face the same challenges and opportunities as self-driving cars.

In terms of opportunities:

Through algorithms, depositors can obtain very comprehensive interest rate information, so they can choose to provide the best interest rate financial institutions;

Through software, the financial system can make the most reasonable credit business decisions and determine whether it can lend money to certain borrowers, and then eliminate the problem of “human discrimination”;

“Autonomous driving banks” can even no longer be managed by people, thereby eliminating the risk of fraud or corruption.

However, self-driving banks also face new risks:

If technology accelerates the withdrawal of depositors’ funds, just as high-frequency trading can accelerate stock selling, this may increase liquidity risk compared with traditional banks;

For similar reasons, asset volatility may be another problem;

In addition, if no one is involved in the valuation, the management of loan collateral may be more difficult.

There is also a risk that in the absence of clear national-level supervision, US states may be eager to fill the regulatory gap, and as a result, a series of inconsistent laws and regulations may be created, which hinders the orderly development of the entire country’s financial system.

In fact, this is exactly what happens in the self-driving car industry.

Therefore, the U.S. federal financial regulator must determine what the “self-driving bank” regulatory program should look like, and whether this type of bank can ensure fair treatment of customers. Of course, most of the deviations and compliance problems encountered by “autonomous driving banks” are so-called “software failures”-note that the software mentioned here is not software written by programmers, but the kind of human thinking. The existing prejudice, although this prejudice may infiltrate the algorithm rules, it is easy to eradicate.

Can financial regulatory agencies properly and more accurately inspect such banks in the form of “software”? We can, and it may be easier than the current supervision of traditional banks. For example, regulatory examiners can be trained to understand the algorithms that make deposit prices or credit decisions and determine whether these algorithms meet legal requirements.

Can financial regulators ensure that “self-driving banks” provide appropriate services to the community? It is absolutely possible. “Self-driving banks” are more efficient in operation, so they can release a lot of capital-you know, the current capital efficiency has become very low due to traditional bank operating costs and excessive reliance on human factors. Of course, algorithm banking is likely to change the nature of employment in the financial industry-there will be fewer bank tellers and fewer programmers. But in the long run, creating better pay and value-added work will also bring greater social benefits.

If the U.S. Office of the Comptroller of the Currency does not have senior managers or directors, can open source software be granted a national bank charter to approve open source software to manage deposits, loans, or payments? Not yet. Because according to current American laws and a series of assumptions made in the early 20th century, the charter can only be issued to humans. However, it is indeed time to re-examine these outdated rules. If a certain rule is used to govern how to use fax machines, do you think this rule still exists?

Can we usher in a new future? There, we can eliminate mistakes, stop reality, and achieve financial inclusion. For optimists like me, such a future is achievable. If regulators, bankers, and policymakers were as bold as they explored self-driving car manufacturers a decade ago, how would the US banking industry be different today?