United States: The Nation's First Cryptocurrency Law: A Chat With North Carolina's Commissioner Of Banks

Last Updated: November 16 2016
Article by Michael E. Slipsky

North Carolina made history when it passed the nation's first law addressing issues surrounding blockchain and virtual currency. NC Privacy Law Blog recently sat down for a conversation with the man whose office played a key role in that effort, state Commissioner of Banks Ray Grace. (Hyperlinks added after the fact by NC Privacy Law Blog)

Q: How does one go about becoming the Commissioner of Banks?

A: Well, every child has their dream job. You want to be an astronaut, a cowboy, whatever. My dream, growing up in upstate New York, was to become a bank examiner.

Q: Very impressive.

A: Well, it's a little more prosaic. I left the Marines in 1969 after my tour of Vietnam. I had been stationed at Camp Lejeune, and for reasons we'll leave out of the interview, I ended up spending weekends in and loving Raleigh.

I returned to New York to finish college, but there was never any question that I would be back. I remember graduating in December 1973. Drove through a blizzard to get to Raleigh, where it was a balmy 60 degrees. Never looked back.

Q: And the office of Commissioner of Banks?

A: The economy wasn't the greatest at the time. We were in a serious real estate recession. I was painting houses to pay the bills. I heard this office had an opening, so I interviewed.

Q: And the rest is history.

A: Pretty much. Now, the job itself has of course changed over the years, though not fundamentally. When I started with the agency, we most often visited community or small regional banks that were integral to the fabric of their communities. Our main concern then was asset quality, especially potential exposure in their real estate portfolios.

The emphasis and focus of our supervision has changed from time to time, but the bottom line has always been the same: protecting the public and ensuring the safety and soundness of our banks, and their compliance with banking laws.

Q: Technology is one of the changes?

A: Yes. When I started, everything was paper. Calculations were often handled on manual adding machines, notably Burroughs 100-key adding machines. Computers were just coming on the scene. They were there of course, and they became prevalent fairly quickly, but in the late 1970s and early 1980s, only a couple of the largest banks had their own mainframes.

Most banks used vendors, third-party processors, to have their work processed. A few very small banks did not adopt any computer processing until the mid-1980s, when NOW (negotiable order of withdrawal) accounts came on the scene.

Q: When did this change?

A: State and federal regulators became concerned about the control issues introduced with automation during the late 1970s. This gave rise to early automation examination procedures to assure banks developed appropriate control protocols for the automated environment. As you might expect, the level of sophistication and emphasis of supervisory involvement with automation evolved with the increasing presence of automation in the industry. At the time, we referred to this automation as EDP; electronic data processing. Now, of course, it's referred to as IT; information technology.

Q: And North Carolina?

A: North Carolina was one of the first states to develop its own EDP examination team and protocols. We contracted with then-Peat Marwick Mitchell to get eight weeks of intensive training on EDP control concerns and the use of their new s2170 automated examination software. The initial team consisted of four volunteer examiners, including myself. One dropped out at the end of the training, but we had a core team to do EDP examinations, and North Carolina is still one of the relatively few states who have such a program.

Large banks then typically used "mainframe" computer systems, while smaller banks first opted for processing by cooperatives or other outside EDP vendors, such as Allied and ADP. Late, manufacturers introduced smaller computers such as the IBM System 34s and 36s, allowing an increasing number of banks to migrate from serviced to in-house processing.

Q: What were the technical issues in those days?

A: Well, you have to understand that computers marked the end of an era. Banks had been doing the Bob Cratchitt thing, using the "Boston ledger" system for almost a century. Bankers and bank examiners alike were accustomed to internal routines and controls in a fully manual system. The old "Boston Ledger," hand-posting of transactions, paper debit and credit tickets, and so forth were the standard for banking.

As banks began to automate their systems, bankers and examiners had to migrate their thinking about the control environment to much different ways of recording transactions and maintaining books and records.

This presented challenge to bankers and examiners. We had to figure out where any new vulnerabilities lay, and how to mitigate them.

Q: How did you go about developing the new system without a track record?

A: By using and building on the training we had initially received from Peat Marwick, and working from analogs in the old manual world. Then on one examination at a small, well-run but newly-automating bank, we were brought up short by the CEO. We were explaining that her bank needed to develop a comprehensive "Systems and Procedures Manual" for its automated operations. She was a well-respected, no-nonsense old-school banker, and she asked me to recommend a similar bank that had such a manual. I couldn't. She asked how we could expect her to do one if we hadn't seen one, and further, how one could be obtained.

I suggested it would be really great if we could spend some time in a bank and develop one from scratch. If only I knew... She called the Governor, who called the Commissioner, who then called me and told me to stay there until I had written the manual. Suffice to say, we ended up writing a Systems and Procedures Manual.

We broke down the operations of the bank into components, and studied their interfaces with the automated systems, and from that, determined where control vulnerabilities existed. We developed practical but effective mitigants, and then reassembled the process.

That manual became the guideline for automated community banks for years thereafter.

Q: So those were the early days of involvement with automation technology for your agency. What about the 2016 Money Transmitters Act? First, why did you opt for legislation? Many regulators prefer to handle it by adjudication.

A: Well, it's a question of fairness. Now I know that bankers have not exactly been popular recently. But in my four decades of experience, it's a clean industry. We look at them closely. And I can count the folks I'd consider genuinely bad apples on one hand.

In 2010 and 2011, my predecessor in office, Joe Smith, took up a fairly comprehensive revision and modernization of Chapter 53 of the North Carolina General Statutes. It had been left unchanged for 60 or 70 years. By the way, that says something about the drafters. It's pretty incredible that you can leave a statute largely untouched for that long without adverse consequences to the industry. But a lot had changed in the banking industry, and our statutes needed to recognize that.

Joe's approach to drafting and successfully seeking passage of that rewrite impressed me as the way laws ought to be written in a functioning democracy. He actively sought out the input of all conceivable stakeholders; practical bankers, bank counsel, consumer advocates, legislative leaders, and held meetings with them at key points throughout the drafting process. This process was eminently fair to all involved, and it worked. That's a model for legislation I wish to follow.

As to financial regulation, my approach is to be transparent about our objectives and expectations. That begins with laws that are fair to the industry and to the consumers it serves.

In applying those laws, I think it's important to give value added with supervision. I do not believe in supervision that leads with the hammer, with enforcement actions or litigation. My preference is to assist entities to understand and comply with existing law, regulation and industry standards of behavior. Only when we encounter illicit resistance to this approach do we move to drop the hammer.

Q: So you opted for legislation because that reflects that philosophy?

A: Yes, very much so.

Q: And it was a conscious decision?

A: Well, sure. We had been having conversations with our colleagues from other states. There was this dawning realization that here comes yet another technological shift: Bitcoin, virtual currency, crypto-currency.

Q: What about virtual currency?

A: Our interest in that space began with our receipt of an application under the Money Transmitter Act from an entity that wanted to do money transmission, but with Bitcoin rather than fiat money. So this triggered a move on our part to examine the law. The decision we would make would set a precedent.

I held the application up for further study, as I didn't think the Governor would want to wake up and learn North Carolina was the epicenter for the latest Mt. Gox or Silk Road scandal. We needed to know more about this technology, to better protect North Carolina consumers. We needed to be sure we had an adequate regulatory framework in place to accomplish that.

Q: What was the response?

A: Well, we contacted the stakeholders: the political leadership, law enforcement, other state agencies, industry groups, consumer groups, folks who were participating in the process, a legislative representative, and began holding periodic meetings to discuss and study the matter. Initially, there were two overarching concerns.

One, some legislators had concerns that virtual currency was somewhat tainted – because of the Dark Web and other scandals, including of course Mt. Gox and Silk Road.

Two, some folks weren't sure about the underlying fundamentals. I mean, this is purely virtual currency. Is this real money? Where is the value?

Q: How did you handle those concerns?

A: It was more a case of letting the process play out. Initially, almost every stakeholder was skeptical. Then, as they worked through it, they started coming around.

And at the end, they had (nearly) unanimously come to the opinion that virtual currency had real value and that it was probably here to stay. This wasn't a flash in the pan or flavor of the month.

Q: So what were your objectives?

A: Well, we recognized that these developments had pluses. It is a fascinating technology. When it worked, it was fast and cheap. It could make settlements faster and easier. And it was durable: it came back from earlier scandals.

Private equity was pouring money in. That investment showed that they believed in it.

As for the concern that virtual currency was ethereal, that it was somehow not real money, just bits and bytes – well, in some ways that's true of our currency, right? Twenty dollars is worth $20 because we agree that it is. It's not worth $20 because the paper and ink are worth that much. And it isn't backed by gold or other tangible assets.

It's backed by the full faith and credit of the government. Virtual currency is validated and backed by believers, those who use it in the virtual marketplace.

Q: So what does the legislation do?

A: Well, the Money Transmitters Act, which we're treating as effective October 1, 2016, clarifies issues of applicability and enforcement.

Financial supervision is costly; so the legislation changes the funding mechanism from fee-based to volume-based assessments, enabling the industry to fund the cost of its supervision.

The legislation gives us authority to enforce federal law (such as BSA) as well as state laws.

It allows so-called "permissible investments," the consumers' first line of assurance that funds will be on hand to settle transactions, to be held in like currencies. In other words, Bitcoin can be held to back Bitcoin. This eliminates the issue of volatility of virtual currency between transmission and receipt.

It clarifies applicability of the Act. For example, it clarifies the scope of the business-to business exemption.

Essentially, the revised MTA treats transmitters of virtual currency the same way as it does conventional, fiat transmitters such as Western Union.

Those conducting the money transmission business for consumers must be licensed, a process by which we seek to keep bad actors out of the business. The legislation recognizes that validation will be done by the market. It does not regulate individuals. Neither does it regulate virtual currency.

Q: And what's your response to critics who say that you're regulating this industry – blockchain, fintech – this free domain, a Wild West of innovation if you will?

A: I think we're doing our job. We recognize there are risks. For example, if there was a major bitcoin theft, people would ask where the regulators were. We are putting reasonable measures in place that will hopefully protect consumers while not unduly hampering innovation. North Carolina encourages business and welcomes technological progress.

We don't regulate the virtual currency industry. We regulate transmissions to consumers and those who facilitate those transmissions for gain – virtual currency is handled the same way we would supervise transactions in U.S. dollars.

All our examinations do – the same examinations that Western Union or any other non-exempt transmitter undergoes – is to verify the systems of control.

Q: What has the reaction to the legislation been?

A: Well, there were some initial misconceptions that caused resentment and pushback. But as people have become familiarized with the details of the legislation, that's largely abated.

Q: Where do you see this headed?

A: Well, there is a lot of excitement, and a lot of talk of disruption. The history of banking is replete with changes. With regard to new technology, including the so-called "fintech" industry, history suggests that bankers will carefully follow new products and delivery mechanisms, determine which will give value to their model, and partner with or subsume them.

Now, we're seeing private equity and the really big banks investing heavily in this technology. It's a pretty heavy lift, but they have the resources and the credibility.

So some amazing changes are in the offing, many of which were not even imaginable five or 10 years ago. The proper role of regulators, in my opinion, is to continue to evaluate both the risks and the potential rewards of these new technologies, construct practical and effective measures to mitigate the risks, and allow the market to implement the changes. That, at least, is my intent.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Michael E. Slipsky
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions