US Office of the Comptroller of the Currency (OCC) Chief Economist: Decentralized finance (DeFi) can drive banking progress, making regulation easier.

The Chief Operating Officer of the Office of the Comptroller of the Currency (OCC) in the United States, Brian Brooks, published an article in the Financial Times describing DeFi as a "self-driving bank" that is at the forefront of the times, driving progress in banking, and can also be regulated.

Current Traffic Regulation Can't Control Dangerous Cars

Brian Brooks stated that as early as 1961, Popular Science magazine foresaw the advent of self-driving cars, which emerged before all traffic safety regulators could adapt their rules. However, all car safety rules, such as speed limits and drunk driving regulations, apply to "dangerous drivers" rather than "dangerous cars."

He believes that the "banking industry" is experiencing a similar road, with the technology behind decentralized finance DeFi being the main driver. Just like current banking regulations, they are still designed to prevent human error.

He mentioned that the U.S. Office of the Comptroller of the Currency requires banks to be accountable for safety, such as limiting loan amounts and regulating working hours to prevent employee fatigue and mistakes, but these bank regulations are designed to regulate bankers.

DeFi Disrupting Traditional Banking

Brian Brooks believes that blockchain technology allows DeFi to operate without human intermediaries, changing the landscape significantly. For example, DeFi can offer interest rates based on supply and demand through algorithms, a decision traditionally made by human bankers.

He also mentioned automated market maker (AMM) platforms, decentralized trading platforms that allow users to trade without brokers, and the ability to provide lending without intermediary institutions.

Brian Brooks believes that these "self-driving banks," although new, are not insignificant and may become mainstream.

Challenges and Opportunities of DeFi

Brian Brooks believes that the automation and non-human intervention of DeFi can bring benefits, such as algorithms finding the best interest rates for savings users. It can also conduct credit assessments through software, eliminating discrimination against certain borrowers. Non-human operations can also eliminate fraud and corruption.

On the other hand, he also sees new risks with these "self-driving banks." High-frequency trading and the high volatility of digital assets could accelerate sell-offs, increasing the opportunities for depositors to withdraw funds, posing more liquidity risks than traditional banks. He also believes that collateral management in loans without human assessment could be more challenging.

Regulators Can Drive the Future of Banking

Brian Brooks expressed his expectations for regulatory bodies, stating that inconsistent regulatory rules across U.S. states due to technological developments hinder the healthy development of the national market, similar to what is happening with self-driving cars.

He believes that federal regulatory agencies can oversee these "self-driving banks," which may be easier than traditional banks. Brooks stated that the vast majority of DeFi biases and compliance issues stem from software errors, not code mistakes, but logical errors in human brains. He believes that these algorithm design errors can be eradicated.

For example, regulators can be trained to review algorithms in setting deposit rates and credit decisions to ensure compliance with regulations.

He believes that the capital efficiency of traditional banks, which is primarily manpower-driven, has been slowed down due to operating costs and human decisions, while DeFi can bring greater capital efficiency. Algorithmic banks will change the nature of financial institutions, possibly requiring more engineers in banks. In the long run, he believes that such changes may bring more benefits to society.

Finally, he believes that this progress can promote inclusive finance, and if regulatory bodies can be as bold as automobile manufacturers were ten years ago, the U.S. banking industry will be different.

Uncertainty Surrounding Brian Brooks's Tenure

Brian Brooks assumed the role of Acting Comptroller of the Currency at the U.S. Office of the Comptroller of the Currency (OCC) under the Trump administration on May 29, 2020, and officially became Comptroller on November 27. Over the past six months, policies such as financial institutions being able to freely offer cryptocurrency custody services to the public and banks being able to engage in stablecoin activities were introduced during his tenure.

It is currently unclear whether Brian Brooks will continue his tenure after the Biden administration takes office.