President-elect Donald Trump's pledge to usher in an
But some in and around the industry worry this more permissive posture could have a downside, especially as it relates to firms dealing with crypto. Karen Petrou, managing partner of Federal Financial Analytics, said a light regulatory touch for these groups could create competitive issues for the banks.
Petrou said bankers are right to be wary of the "tsunami" of regulation that have been proposed in recent years, but warned them not to let recent events distract them from the dangers of digital assets firms being permitted to engage in bank-like activities without facing the limitations — and costs — associated with bank regulatory regimes.
"The day-in-day-out, capital, liquidity, even the bank merger stuff, pale in terms of the impact on franchise value when you start looking at what would happen if unregulated competitors — whether crypto or otherwise non-traditional institutions — get an open field," Petrou said.
On the campaign trail,
The once and future president has also surrounded himself with advisers with deep ties to the crypto economy, including Elon Musk, the CEO of Tesla and SpaceX, who endorsed "abolishing" the Federal Reserve last week.
Some in the a more accommodative approach to crypto as a positive development for banks. Young Kim, a regulatory lawyer with the firm Clifford Chance, said traditional financial institutions have a lot to gain by incorporating technology that originated in the crypto space.
"There are a lot of good reasons for incorporating more of the technology into the banking sector," Kim said, pointing to the technology's ability to reduce settlement times.
Groups and individuals associated with each industry have expressed frustration with the Biden administration's approach toward digital assets, arguing that banks should have more freedom to engage with crypto groups without flouting supervisory guidelines or incurring enforcement actions. Some have accused agencies of actively trying to de-bank the crypto sector, but regulators maintained that their efforts have focused solely on bad actors and firms with unsafe and unsound practices.
Michael Selig, a partner with the law firm Willkie, Far & Gallagher, said he expects the Trump administration to take a more innovation-oriented approach to crypto.
"The Biden administration essentially created a moat around a lot of our legacy financial technologies, financial systems and intermediaries," Selig said. "A new Trump administration can break down that moat and equalize the playing field for new entrants, crypto exchanges, [descentralized finance] protocol developers, offerers of novel technology assets. It's going to be a much more accommodating regime."
The exact tenor of this policy change will be dictated by the regulators appointed by the Trump administration next year, namely the chair of the Federal Deposit Insurance Corp., the Comptroller of the Currency and the director of the Consumer Financial Protection Bureau. Market regulators, such as the Securities and Exchange Commission and the Commodity Futures Trading Commission, will also play a heavy hand in the future of crypto regulation, while the next Treasury secretary and attorney general will dictate how existing laws are enforced against crypto-related entities.
Regulators could make it easier for banks to incorporate digital assets and digital ledger technology — also known as Blockchain — into their existing product offerings, provide custody services for digital assets and form partnerships with crypto firms. Agencies could enact these changes by amending prior supervisory guidelines, such as the requirement that banks obtain a "non-objection" letter before engaging in such activities, or removing such barriers altogether.
There are also tools that have been left dormant since the first Trump administration, such as the OCC's special purpose national bank charter, that could enable crypto firms to enter into the banking space directly. And policy changes can also be conveyed in ways less clear to the general public through individual bank supervision.
But, achieving Trump's crypto agenda in full will take more formal, holistic measures, Russell Sacks, a partner with the law firm King & Spalding, said.
"An absence of regulation will be a void filled by state and local governments on one hand and by the SEC and the CFTC on the other. Even in a deregulatory, lower enforcement activity environment, the administration will therefore still have to grapple with these issues," Sacks said. "To achieve the things Trump said on the campaign trail about having the administration and the federal government facilitate digital assets and crypto, they're going to need a regulatory framework for those assets."
Throughout the Biden administrations, bank regulators have broadly treated the crypto sector as a hotbed for money laundering activity and a
With these issues still fresh in the minds of regulators and lawmakers alike, and the government's longstanding reliance on intermediated finance a means for mitigating bad actors, Kim said it is unlikely that crypto will suddenly be given a free pass under a Trump administration.
"For better or worse, the U.S. government has deputized the banks for controlling money laundering risk," he said. "I don't see that dynamic changing anytime soon."
Still, regulatory agencies would not be caught flatfooted by a policy change that sees crypto incorporated more formally into the financial system.
For years, there has been an argument that the risks presented by the crypto sector would be best managed if they were brought into the so-called regulatory perimeter. While it may not be the prevailing view among agency heads, Jess Cheng, a partner with the law firm Wilson Sonisi and a former senior counsel at the Federal Reserve Board, said that doesn't mean it has not been considered by institutions.
"From the outside, it might seem like it's been unanimous that crypto does not belong in banking, but actually, within the government, there has been a push and pull between different views — though one has certainly been stronger than the other in the last four years," Cheng said. "Looking ahead, that's something that might change, but I would not expect the federal banking agencies to go off in a completely different direction. There are views and analysis internally about [regulating crypto]."
