WASHINGTON — Before the March bank failures brought core banking issues like capital and liquidity back to the fore, regulators repeatedly warned banks against exposure to digital assets.
Though banks were largely unscathed by the collapse of giant crypto exchange FTX late in 2022, the event reinforced regulators' skeptical posture, culminating in a January
"The agencies have significant safety and soundness concerns with business models that are concentrated in crypto-asset-related activities or have concentrated exposures to the crypto-asset sector," the regulators wrote in the joint guidance.
In addition to discouraging banks from working with crypto, they have penalized crypto firms that engage in behavior that too closely resembles banking, including marketing materials that claim crypto customers' accounts are covered by FDIC insurance. The
Regulators like Acting Comptroller of the Currency Michael J. Hsu have since doubled down on the tone in the joint guidance. Hsu indicated at a June press conference that the agencies are continuing to recommend banks use caution toward digital assets. He also noted that recent volatility may have made banks less interested in crypto.
"The crypto winter was pretty tough for the crypto industry," he said. "Those who I put into the bucket of crypto curious — on the banking side — lost some of that curiosity, given some of those events. The issue of scams, fraud, hacks; those continue, those haven't gotten better over time. So that issue has kind of receded in terms of materiality, it's something we care about, it's something that we still expect banks to approach prudently, but I'm just not hearing as much noise or demand for banks to get in on crypto."
A few days later,
Biden administration bank regulators have made clear that they will continue to try to retain separation between crypto and traditional banking, and some experts argue that they have good reason to do so.
Art Wilmarth, a law professor at George Washington University, said this spring's bank failures provided regulators with concrete evidence that banks that did business with crypto companies faced unique risks. The turmoil in the crypto market, triggered by the collapse of major crypto industry partner banks like Silvergate, Signature and Silicon Valley Bank, was, according to Wilmarth, evidence of the growing risks of interconnection between the crypto industry and traditional finance.
"[Circle had] $3.3 billion of reserves for their USD stablecoin [at SVB. When it failed,] there was a panic in the crypto markets, and the USD coin fell to 90 cents in the dollar," Wilmarth said. "Doesn't this just show us the dangers, once we start linking our banking system with this unregulated crypto industry? The problems in the crypto industry are going to spill over into the regulated industry and vice versa."
Will Congress weigh in?
Regulators can only do so much without congressional action. Despite this,
At the same time, multiple bipartisan coalitions in the Senate have made progress on crypto-anti-money-laundering provisions. Senators Kirsten Gillibrand, D-N.Y., Cynthia Lummis, R-Wyo., Elizabeth Warren, D-Mass., and Roger Marshall, R-Kan., successfully included
A bipartisan group of senators, led by Jack Reed, D-R.I., has also
Both bills respond to a concern regulators have long expressed: that public blockchains are incompatible with BSA and AML compliance. January's guidance memo explained the agencies' concerns in more detail.
"The agencies believe that issuing or holding as principal crypto-assets that are issued, stored, or transferred on an open, public, and/or decentralized network, or similar system is highly likely to be inconsistent with safe and sound banking practices," the guidance noted.
Hsu also echoed this skepticism toward permissionless blockchains
"The non-permissioned nature of public blockchains makes them attractive to criminals and others engaged in illicit finance and full compliance with anti-money-laundering rules is extremely difficult for crypto intermediaries to achieve," he said.
Are crypto tokens securities?
With few clear paths to a comprehensive framework, banks are taking a wait-and-see approach. Meanwhile, the Securities and Exchange Commission, the head of which, Gary Gensler, has said that he believes cryptocurrencies are largely securities, has taken an aggressive approach in enforcing securities laws against the crypto industry.
According to
The SEC took legal action
These lawsuits could matter greatly for the future of the crypto industry, investors and crypto partner banks. Court rulings may better define which cryptocurrencies are securities and outline legal precedents like crypto firm consumer protection obligations and AML requirements.
While the SEC has had some success in reigning in crypto, the agency's authority faced a minor setback after a
Members of the crypto community expressed enthusiasm over the ruling, describing it as a potential game-changer for other crypto-related cases. Gensler, however, did not appear deterred, reiterating his agency's commitment to bringing noncompliant firms into alignment with SEC rules in remarks to the
"We're still looking at it and assessing that opinion," he said.
