For true debanking reform, actions must follow words

Bloomberg

Recent disclosures have shown that the practice of debanking has caused considerable harm among crypto companies and other communities disfavored by bank regulators. At a Senate hearing on Feb. 5, where I was privileged to testify, Sen. Tim Scott described debanking as a case of "federal regulators exploit[ing] their power." He noted further on February 13 that regulators had "seriously overreached" on debanking. Full accountability and remediation will take time, but regulators can begin today to reverse that course through clear action to renounce debanking.

Two regulators have taken very different approaches on that issue, with one engaging in openness and action, while the other, to date, has primarily offered words.

In an admirable exercise of candor, Acting FDIC Director Travis Hill has produced more documents than demanded in connection with the "pause letters" scandal, has admitted that his agency instructed banks not to bank crypto companies, and has stated that he will not tolerate those at the FDIC who engaged in or supported debanking. He also agreed to withdraw the FDIC's interpretive letter FIL 16–2022, one of the "gatekeeping" letters requiring banks to seek "supervisory non-objection" before they could do business with any crypto company.

In contrast are recent statements from Federal Reserve Board Chairman Jerome Powell. In Senate testimony on Feb. 11 about an internal Fed document that apparently allowed the central bank to deny access to master accounts to those who spoke or acted in a "controversial" manner, Powell stated that he was "troubled" about reports of debanking, would take a "fresh look" at it, and that the referenced part of the internal manual would be deleted. Chairman Powell also has said that the Fed doesn't "want to get in the way of banks doing business with perfectly legal customers." While welcome, such words fall short of remedial action. They also skirt two important issues.

First, who created, approved and used the internal manual, and why? This appears to be a classic example of "regulatory dark matter," so transparency is in order on this issue.

Second, if banks are "perfectly able to serve crypto customers" and the Fed does not want banks to terminate customers because of risk aversion about regulation and supervision, that raises several questions. Why has the Fed not followed the FDIC and withdrawn its "gatekeeping" documents, Supervision and Regulation Letters SR 22–6 and SR 23-8? Why has it not withdrawn or modified the Jan. 3, 2023, Interagency Statement, which states that "issuing or holding crypto assets as principal" is "highly likely to be inconsistent with safe and sound banking practices"? And why has it not withdrawn or modified its Feb. 7, 2023, policy statement declaring that the Fed "has not identified any authority permitting national banks to hold most crypto assets, including bitcoin and ether, as principal in any amount"?

To change direction regarding the provision of crypto services (which may include holding crypto as principal at some level), the Fed needs to change its written record. As long as those documents remain undisturbed, the Fed is on record as against crypto within the banking perimeter, and banks will act accordingly. Those harmed by debanking deserve much better.