Engaging with regulators, insights from near and afar, an interview with Chris Calabia - former regulator at the Federal Reserve Bank of New York

This week we feature an interview with Chris Calabia who worked for over twenty years at the Federal Reserve Bank of New York. Through that role and others, including as a Senior Advisor on regulatory policy at the Bill & Melinda Gates Foundation, Chris has worked closely with regulators from all of the world, providing him a unique perspective not only into the mindset of US regulators, but regulators in many different socioeconomic contexts. Chris provides strong insight for regulators and innovators alike. 

Chris currently serves as a Senior Advisor to the MIT Digital Currency Initiative and operates FC Calabia Solutions, LLC. You can find him here on Linkedin.

The Interview

The Axial Studio

Tell us how you ended up becoming a regulator.

Chris Calabia

I don’t think any kid has ever said, “I want to be a regulator when I grow up!” If you asked me in elementary school what I wanted to be when I grew up, I was dreaming of being a mission specialist for NASA. That changed after I spent my junior year of high school as an exchange student in Germany. I returned home with a strong interest in the global economy. When I was thinking about what to do after grad school, my thesis advisor said “you really need to learn about how the economy works and how banks function… there’s a really great place you can do that: The Federal Reserve.” I knew what the central bank was and was familiar with concepts like monetary policy, but didn’t know much beyond that. When I met with the recruiters, they told me about the role of a bank regulator. I ended up getting an offer and going to the Federal Reserve Bank of New York.

The Axial Studio

You have a lot of experience working with regulators all over the world and helping them think through innovative new areas. How did you influence other regulators to change their approach or thought process when it came to addressing innovation?

Chris Calabia

Yes, I didn’t get to circle the globe as an astronaut, but I did circle it as a regulatory policy expert. First, I try to encourage regulators to take a big step back from the day to day and ask themselves, “Why are we here? What are we trying to accomplish as regulators? And what does success look like?” And if you ask a regulator what success looks like, it's hard to define. Is it the absence of bank failures? No. Because having some failures reminds people in the marketplace that they need to manage their risk appropriately. Also, you don't want to have these huge boom and bust cycles, where the economy grows very rapidly then collapses because it was unsustainable growth. 

In some of the countries where I got to work, the central bank or the regulatory authority actually had a mandate to grow the banking system or promote the economic development of their countries. And in some cases that meant making sure that all people had access to a formal bank or financial services account. Well if you have that mandate, you can think about how to achieve that. And if the legacy players aren’t able to deliver this right now, or are reluctant to make changes, we should consider other players who could come into the marketplace who may have better means of serving people who’ve been excluded. These might be local players or innovators. In some cases that also makes incumbents decide to learn and change. 

The Axial Studio

It feels like regulators often are focused on prevention of harm versus achieving some positive outcome. (Matt speaking) For me that was what was exciting as a regulator, thinking beyond prevention of harm to achieving outcomes that actually benefit people. 

Chris Calabia

Yes, often people think about regulation as trying to prevent harm, but there is a much broader purpose. Regulation, for me, seeks essentially to reduce uncertainty. Reduce uncertainty for consumers and reduce uncertainty for providers. So what do we mean by that? As consumers, most of us have little or no idea what happens to our funds when we deposit them in a bank. As a regulator you want to ensure that consumers know there are guardrails around their deposits and it will be safely managed, and there’s someone to make sure they get their funds. And if there is a failure, there is deposit insurance. 

For providers, you want to reduce uncertainty around what might happen if something goes wrong: what bad outcomes might they face, what their limits are in terms of their authority, and what they are licensed to do. You want them to know how regulators will respond, such as with prompt corrective actions.

The Axial Studio

What advice do you give innovators who are trying to build in an unclear environment?

Chris Calabia

A challenge is that often people view regulators as being behind in terms of advances and innovation and not up to date on the latest technologies. In many cases that's absolutely true. They're not in an innovative space in the same way that an entrepreneur is and they're not necessarily following every latest development in technology and business practices. Many of them would like to, but they just don't necessarily have the bandwidth to keep up with everything. 

So one thing that I often tell innovators is that you have to think about the regulator as a person and help them understand what it is you're trying to accomplish. Give them some background and insight into the technology that you're using and why this is beneficial. Be honest with them about the opportunities and the risks. One thing that always stood out for me is when someone came in supremely confident about their success. That was a red flag. 

So I encourage innovators just to be honest with people and treat regulators like normal people. Recognize that they may not know everything about your space. And it may not be possible for them because they have such a different background and set of responsibilities. But most regulators want to do the right thing. They want the economy, financial, and banking systems to work well. 

The Axial Studio

For founders and builders that are new to a regulated industry, how would you recommend they learn about regulation and how to engage regulators. Especially if they are early in their journey and don’t have the means to engage advisors?

Chris Calabia

I've met a lot of people exactly like that.  I was at the Fed when we held one of the first round tables for FinTech innovators.  I was the only regulator invited to meet with them – and it turned out all of their questions were about regulation – for example, they didn't really understand why they needed to verify someone's identity. So I had to tell them a story about the history of money laundering and illegal trade in narcotics. 

My advice to innovators is to start out first by reading some of the speeches from senior regulators in the US such as Federal Reserve Governors and senior people at the OCC, FDIC, Treasury, and the state regulators. This will give you  insight into the concerns that regulators have. 

Then you do need to think about the space that you're planning to operate in. Especially if you're going to be dealing with retail customers, then you do have to educate yourself about laws and regulations regarding things like anti-money laundering and know your customer rules, or customer protection, etc. You will have to crack open some books and read about those concepts. 

Also, if you can, try to find some mentors in the industry, who can give you some insight into those rules and how to comply with them. There may be some investments you have to make, such as developing a compliance policy, but that may be one of the most important investments you make so your staff understands what they can and cannot do. 

The Axial Studio

How do regulators react when they hear about new technologies like crypto/web3? 

Chris Calabia

When I was a regulator, I found it difficult because there's so much going on. I've met with regulators all over the world, and everyone feels thinly stretched. They never feel like they have enough time and resources to do all the things that they're required to do. So it's hard to add on the personal readings and attend seminars to keep up. For example, when I learned more and more about Bitcoin and stablecoins, I realized I really need to educate myself. So I actually took an online class. One of the things the instructor recommended is to open an account, and I had never thought about doing that. It was a little bit terrifying uploading a copy of my driver’s license to a company I had not heard of before, but I did it. I opened an account and I bought some crypto, not a lot, but just enough for me to learn more about how it worked. Unfortunately, I bought it near the top. So I also experienced the roller coaster that many investors experience, but I was really intrigued by the technology and its potential. I work now at MIT at the Digital Currency Initiative because I am intrigued by the potential of central banks issuing a stablecoin. I also want to make sure they are well informed about the opportunities and risks. I think it's important for regulators to do as much as they can to educate themselves about these things. One of the best ways for regulators to do that is to talk with innovators, providers, and consumer advocates. We’ll all do better when we learn together.