Federal regulators say banks are free to serve crypto firms, but some in the industry question how feasible doing so will be in light of recent guidance.
The Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency have issued two joint statements this year flagging risks related to digital assets and setting standards for how to mitigate them.
The agencies have noted that the guidelines are not binding requirements, nor are they meant to steer banks away from crypto firms. Rather, they bill the statements as providing transparency into their evolving assessment of a nascent industry.
Still, some regulatory lawyers and industry participants worry the new statements could create a de facto supervisory framework that blocks crypto firms from the banking sector entirely.
Caitlin Long, founder and CEO of the Cheyenne, Wyoming-based Custodia Bank, said the statements mean any attempt to engage with digital assets will be met with more scrutiny from bank examiners. Whether that makes it difficult — or impossible — for banks to take crypto-related deposits will come down to individual supervisory evaluations, all of which will be confidential.
"That is the question, is this a backdoor ban on banking crypto, or are [regulators'] overt statements that they're not banning the banking of crypto or any other lawful industry accurate? We don't know the answer to that," Long said. "No one knows where the guardrails are right now."
Policy statements do not amend any regulatory statutes, so agencies are not required to go through a formal outreach process to public comments — as is required for formal rulemakings. But, because of the sweeping nature of some of the suggestions, Long said, the agencies would have been better served by soliciting input from crypto industry participants more familiar with its underlying technology.
Specifically, she flagged a portion of one of the statements warning about the risks of "open, public, and/or decentralized networks," descriptions that could apply not only to crypto networks, but also broadly used systems such as the hypertext transfer protocol, or HTTP, which serves as the backbone for the World Wide Web. Similar protocols are used for email, voice over internet and other communication systems that convey information about the movement of funds.
"Every bank uses all of those," Long said. "And yet, the statement was drafted so broadly, so hastily and not put out for public comment, that, if you take it literally, the bank regulators banned the banks from using the internet."
Custodia, which provides digital banking and crypto custody services to business customers, is suing the Fed over access to a so-called master account at the Federal Reserve Bank of Kansas City, which would provide it access to the central bank's payments system.
The agencies issued their
On Jan. 27, the
Then
During a press conference Tuesday on other matters, FDIC Chair Martin Gruenberg said the joint statements were patterned on feedback the three agencies have given to the individual banks they supervise.
"We indicated that as we gain more experience on this case-by-case review, we might issue broader guidance and indeed that's what we did," Gruenberg said, adding that the agencies were working together to provide consistency and that further directives could be issued in the future.
Still, some in the space say explicit restrictions are unnecessary to curb bank engagement with crypto.
Gabriel Rosenberg, a partner at the law firm Davis Polk who specializes in crypto and financial regulation, said the agencies' latest joint statement will likely have a chilling effect on banks taking on crypto deposits.
"What they say in the statement and what they've said before is this is not meant to discourage or encourage any particular bank from having relationships with any particular industry," Rosenberg said. "But, banks already pay close attention to things like concentration risk, so it's not clear to me why regulators would put out a joint statement other than to quietly push their examiners and banks away from banking crypto-related companies."
The policy statements have also
Isaac Boltansky, director of policy research at the investment bank BTIG, said recent regulatory statements could have the same impact as Choke Point — less bank engagement with a controversial line of business — but they are being carried out in a much different way.
"First, we think it is important to note that Operation Choke Point was effectively covert, as the pressure was applied at the bank supervisor level. Second, since [the second half of last year] every single bank regulator has expressed its concern with digital assets and issued policies that raise the bar for compliance," Boltansky wrote in an analyst note. "Bank regulatory actions over the last six months have made accessing the financial system more difficult for crypto firms, but it is important to underscore that this has been done in the light of day and does not carry either the political or procedural baggage of Operation Choke Point."
The statements come at a time when many banks are rethinking their exposure to crypto-backed firms in the wake of the collapse last year of FTX, the world's second-largest crypto exchange at the time. The company's demise triggered failures of other digital-asset firms and led to losses at crypto-affiliated banks, such as
A report from the FDIC's Office of Inspector General released last week found 136 insured depositories are either engaged in digital-asset activities or plan to be. It is unclear how that figure compares with interest before the FTX collapse, but there is a general sense among market participants that appetites for crypto exposure have waned.
In that regard, some see the statements from regulators as a positive development for integrating crypto into the banking system.
Alison Hashmall, a banking, financial institutions and fintech focused lawyer with the firm Debevoise and Plimpton, said the most recent joint statement provided helpful clarity on how banks can serve crypto customers in a safe and sound manner.
"I always think it's helpful for regulators to explain their expectations," Hashmall said. "We didn't have much guidance before, just statements that these activities are risky and safety-and-soundness issues. This is more constructive. It gives a sense of a road map for how this activity could be conducted on a going forward basis."
Long said the focus on the risk of runs on deposits in the agencies' latest statement was a win for Wyoming's special-purpose depository institutions charter, which prohibits banks from issuing loans with customer deposits to mitigate run risks.
"The 100% liquid business model was vindicated," Long said. "That is implicitly what the bank regulators are saying, that they don't want the traditional banks that engage in U.S. dollar services for the digital-asset industry to do the traditional borrow-short-and-lend-long strategy."
