151 years of federal banking regulation in the United States

DeekshaSingh151 years ago, on February 25, 1863, the United States enacted the National Banking Act of 1863 (“National Banking Act”), the first federal banking law, with the goal of creating a single national currency.

Single currency, national banks

At that time, notes were issued by several state banks and linked to their gold and silver holdings. Even though these notes were exchangeable and denominated as U.S. dollars, they were being issued by different banks with different paying abilities. This is because the gold and silver holdings of these banks were not uniform and they were not linked to any single unified entity or standard. The established national banks could issue notes that were printed by the government and backed by the U.S. Treasury. After the Act, each bank’s ability to issue notes was linked to the level of capital it deposited with the Comptroller of Currency at the Treasury, a position created under the Act. It also facilitated the phasing out of notes issued by the state banks by providing for a system of taxing those notes.

The banking system

Within one year however, the 1863 law was replaced by the National Bank Act of 1864 (“NBA”), which created the banking system of the United States. It established federally issued bank charters, which enabled the setting up of new national banks, and the conversion of state banks into national banks.

This is not to say that state banks became redundant. Since state banks could no longer issue notes, the capital requirements they had to fulfil became less onerous. This allowed the state banks to carry out rapid branch expansion while they continued to compete with the national banks in relation to regular banking services.

This dual system of banking created by the NBA now defines the U.S. banking system. The Comptroller of Currency (like the Reserve Bank of India in India) is responsible for the administration and supervision of national banks (and some of the activities of their subsidiaries).

John D Hawke (right) was the controversial Comptroller of the Currency who used the 1863 law to bar the Attorneys General from investigating and prosecuting predatory lending practices by banks and mortgage companies. Image on the left is published under a CC BY-SA 3.0 license.

As recently as 2004, the provisions of the NBA were used by the then Comptroller to bar the Attorneys General of states from investigating and prosecuting national banks for predatory lending practices in relation to the real estate sector. The Comptroller’s move is believed to have hastened the sub-prime mortgage crisis.

Banking regulation

The NBA created a unique, but fragmented, system of banking regulation in the U.S. with both federal and state-level regulation. Banking regulation is also separated from the regulation of other financial services, each of which is regulated by a separate agency.

Apart from the Comptroller, depending on the charter and the organisational structure of the bank, a national bank’s primary federal regulator could also be the Federal Deposit Insurance Corporation or the Federal Reserve Board.

The varying priorities of banking regulation

The NBA was the first step in defining banking regulation in the U.S. Since then, several laws have addressed different regulatory concerns.

– Following the 1929 depression, the Glass-Steagall Act was enacted to establish the Federal Deposit Insurance Corporation and provide deposit insurance to protect depositors from losing their deposits if a bank became insolvent.

– In 1999, a part of the Glass-Steagall Act was repealed, with the enactment of the Gramm–Leach–Bliley Act also known as the Financial Services Modernization Act of 1999. This allowed commercial banks, investment banks, and securities firms to consolidate. The aim of the Act was to increase competition in and provide equal access to the financial services industry. One of the criticisms of this Act however, was that it would result in banks that would become ‘too big to fail’.

INTRO-Banking-And-Finance-PL– When the recession hit in 2007, the necessity of overhauling financial regulation in the U.S. became the primary concern of the U.S. government. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) was enacted in response to this need. It impacted not just banking regulation, but every sphere of financial services regulation. It streamlined the regulatory framework for the financial services industry in the U.S. by creating new agencies like the Financial Stability Oversight Council and the Bureau of Consumer Financial Protection. It also substantially changed the powers of existing agencies including the Comptroller, the Federal Reserve, the Federal Deposit Insurance Corporation, and the U.S. Securities and Exchange Commission.

From its formative period therefore, federal banking regulation in the U.S. has switched priorities from the protection of depositors to supporting the aggressive practices of banks, and then back again to the protection of depositors. It is still too early to say whether the lessons from the last recession will continue to affect financial policy and regulation in the U.S.

The Indian parallel to the 1863 law is the Reserve Bank of India Act, 1934. Studying the evolution of banking laws in the United States provides an interesting parallel to the evolution of our own laws. The Indian government and Reserve Bank of India have always been conservative, often taking pointers from the mistakes of regulators in the West. So far, this has held them in good stead.

(Deeksha Singh is part of the faculty on


RBI needs to take a position on Bitcoin’s status soon

DeekshaSinghBangalore was the venue for an interesting event almost two weeks ago. The Global Bitcoin Conference was organised by the digital currency awareness organisation CoinMonk to highlight the importance of virtual or digital currencies. Bitcoin is the most prominent currency among these virtual currencies, that is, money that exists as computer code. Various stakeholders are keen on convincing the government and regulators that Bitcoin is a valuable economic innovation, and that it will not be used for illegal transactions.

What is Bitcoin?

Bitcoin is an open source, peer-to-peer, electronic cash system. It is software that allows the virtual currency named Bitcoin to be mined and stored in a personal Bitcoin wallet. It also allows users to send and receive Bitcoin(s). Bitcoin cannot be redeemed for another type of money or for a commodity, like gold. It is not backed by any government or other legal institution.

Traditional currency usually has the following features: scarcity, divisibility, portability, and easy storage. They are minted and issued by central banks of countries.

In the case of Bitcoin however, new Bitcoins are issued to competing ‘miners’ online. These miners solve problems using their computers and thus generate Bitcoin. A person can create unlimited free Bitcoin accounts. You can find a primer on the use of Bitcoins here.

BitcoinThe growing popularity of Bitcoin, since its inception in 2008, has resulted in the evolution of a number of entities such as exchanges, transaction services providers, and joint mining operations. It is now accepted by a number of service providers.

In India too, Bitcoin has found a fair number of users. According to this article in the Mint, more than 24,000 people in India have downloaded Bitcoin in 2013 itself. While this number of users is nowhere close to countries like U.S., China, or Germany, there is enough activity to suggest that government and regulators in India should pay attention. The Reserve Bank of India (“RBI”) however, is yet to take a stand.

Is Bitcoin currency?

Earlier this year, a U.S. District Court in Securities and Exchange Commission v. Trendon T. Shavers, as part of a larger discussion, discussed whether Bitcoin is a currency. The court held that:

It is clear that Bitcoin can be used as money. It can be used to purchase goods or services, and as Shavers stated, used to pay for individual living expenses. The only limitation of Bitcoin is that it is limited to those places that accept it as currency. However, it can also be exchanged for conventional currencies, such as the U.S. dollar, Euro, Yen, and Yuan. Therefore, Bitcoin is a currency or form of money, and investors wishing to invest in BTCST provided an investment of money.”

Now, in India, Entry 36 in List I in the Seventh Schedule to the Constitution of India, 1950 squarely places the power of making law on the subject of ‘currency, coinage, and legal tender’ with the Union Government. The RBI was formed under the Reserve Bank of India Act, 1934 (“RBI Act”) to take over the management and issue of currency from the Central Government. Section 22 of the RBI Act gives the RBI the sole right to “issue currency notes of the Government of India”. Interestingly, there is no definition of ‘currency’ or ‘currency notes’ in the RBI Act. At the same time, there is also no express prohibition on issue of ‘private currency’ by private entities.


There is a definition of currency in Section 2(h) of the Foreign Exchange Management Act, 1999, according to which ‘currency’ includes “includes all currency notes, postal notes, postal orders, money orders, cheques, drafts, travellers cheques, letters of credit, bills of exchange and promissory notes, credit cards or such other similar instruments, as may be notified by the Reserve Bank”. This means that until the RBI notifies virtual currencies as ‘currency’, the management and issue of Bitcoin remains legally, a grey area.

The RBI is certainly aware of the existence of, and the risks involved with virtual currencies. While it has stated that the absence of a distinct legal framework means that the traditional rules of financial sector regulation and supervision are not involved, it has remained silent on what rules need be evolved to deal with such currencies.

That the regulation of Bitcoin and other virtual currencies is necessary is obvious even from a cursory examination of the legal issues it throws up. For example, a question similar to the issue in the Shavers case mentioned above, is whether Bitcoin investments in Indian entities will be considered ‘securities’? What about the ramifications on foreign exchange management and regulation? To quote this article, the use of Bitcoin can significantly reduce the costs of transferring U.S. dollars across the border from India. Of course, the opportunities for the use of such a currency—which is fungible with other currencies but is not owned or regulated by any government or legal entity—provides huge avenues for money laundering and use in illegal activities.

So, as the number of Bitcoin users in India increases and Bitcoin exchanges like Buttercoin gear up to start operations in India next year, the RBI (which has currently adopted a wait-and-watch policy) will need to clarify its position sooner rather than later.

(Deeksha Singh is part of the faculty on