- Key insight: Permissibility planks in the markets structure bill could open up banking activity more widely than advertised, some experts say.
- What's at stake: At the very least, the provisions will put recent Trump administration actions around banking and crypto into statute.
- Forward look: Crypto and banking interests had what was described as a productive meeting with the White House last week over the yield issue, but no public compromise has been reached.
WASHINGTON — The risk of deposit flight might be the most visible flashpoint of the crypto-legislation debate, but a bigger change is coming from a less noticed part of the bill: permissibility.
For months, crypto and bank lobbyists have locked horns over a section of the crypto market structure bill that would put restrictions on how crypto companies can offer rewards to customers, which
Banks want a broad prohibition that includes third-party non-stablecoin issuers, while some crypto companies want the ability to pay some kind of rewards or offer subscription programs for using stablecoins instead of just holding them, two people at the meeting said.
But bankers are motivated to pass the legislation, even considering the risk to deposits, because of permanent changes to bank permissibility, or the legally allowed activities, investments and services that banks and their holding companies can conduct.
A chunk of the bill is dedicated to expanding the definition of which activities banks are allowed to participate in to explicitly include digital assets, an answer, the bill's authors say, to the Biden administration's attempt to keep risky crypto assets out of the banking system. Regulators
But some say that the market-structure bill goes further. Graham Steele, a fellow at the Roosevelt Institute and former Treasury Department assistant secretary for financial institutions under the Biden administration, said that the bill's general definition of "digital asset" paired with the idea laid out in the bill that a depository institution and their holding companies can own digital assets appears to eliminate many activities restrictions in banking.
Steele and other policy experts say that one interpretation of the market structure bill's permissibility section means that rules around what kinds of activities banks are allowed to participate in is significantly loosened, because banks can simply put that activity on the blockchain.
"All a bank or [bank holding company] would have to do would be put impermissible equities or assets on the blockchain, and it becomes permissible," Steele said. "This seems to potentially open a giant loophole in both the National Bank Act and Bank Holding Company Act restrictions on permissible activities."
"It's absolutely something to be concerned about. It essentially eviscerates the banking laws by saying, basically, if you put anything on the blockchain, it inherently becomes a permissible bank activity," said Hilary Allen, a bank law professor at American University. "Anyone who doesn't want to comply with banking activities restrictions can simply whack it on a blockchain."
Even if one doesn't agree with that broad reading, Steele said, the law appears to make some traditionally impermissible activities permissible. For example, he said that the bill seems to authorize prime brokerage using crypto, which financial holding companies typically do from another subsidiary, not from the bank.
Another camp of experts, including proponents and authors of the bill, say that the permissibility section simply formalizes guidelines that Trump administration regulators have already put out. In the last year, bank regulators have rolled back those Biden-era restrictions, and greenlit banks to involve themselves in the crypto industry.
"What we learned between the change of administrations from Trump one to Biden and then Biden to Trump two is that the regulatory actions are not always durable, and so having the statutory authorization would provide that durability," said David Portilla, co-head of Davis Polk's financial institutions practice. "In addition, I do think there's value in Congress providing clear direction about what is permissible for banks and bank holding companies, without having to rely on the regulators to do that on their own."
Rather than bringing risk into the banking system, Portilla said that the change is helpful for banks and crypto firms and financial stability alike.
"Lending can present a threat to financial stability if it's done in an unsafe and unsound way at scale. I think that's true for anything," Portilla said. "Bringing an activity within the banking perimeter is a good thing when that activity is essentially a financial intermediation activity, which is what banks, bank holding companies provide. And then it would be subject to supervision by federal banking agencies, which I think are pretty stringent supervisors."
Others like Steele and Allen disagree.
"I think there is more harm than good to be caused by doing this legislatively," Steele said. "Many of these laws have, for better or worse, not been amended very often. Locking these definitions into statute gives them a privileged status few activities enjoy and prevents regulators from updating their interpretations as these markets and products evolve."
The change comes as crypto markets experience the kind of turmoil for which they are famous. The price of bitcoin has fallen about 50% since October, and the total value of the crypto market has fallen a parallel 50%. That's the kind of volatility that Biden-era regulators tried to keep out of the banking system. The Trump-era approach has been dramatically different.
"Anything that brings this volatility even a smidgen closer to the center of the banking system is exposing what is already an extremely leveraged and fragile banking system," Allen said. "But it's not surprising, given that the push under this administration has been to integrate traditional finance and crypto as much as possible, to hear that they are laying the groundwork for banks to sort of not only perform custodial functions, but to potentially bring it on balance sheet itself."
