Banks under pressure from US authorities to cut ties with crypto firms
US authorities appear to be reviving past techniques to crack down on crypto firms and banks that provide services to the industry, multiple sources told Cointelegraph.
The purported strategy consists of isolating the traditional financial system from the crypto market by spanning “multiple agencies to discourage banks from doing business with crypto firms,” with the aim of leading crypto businesses to become “completely unbanked,” according to co-founder Nic Carter by venture firm Castle Island and crypto-intelligence firm Coin Metrics.
The claims rely on conversations he had with bank executives, including cryptonative and traditional banks, Carter told Cointelegraph. “They tell me they are facing enormous pressure from the Fed [Federal Reserve] and the FDIC [Federal Deposit Insurance Corporation]. Founders tell me they can’t get bank accounts anywhere for new startups.” According to Carter:
“Regulators threaten and bully bank management behind the scenes, then publish public ‘guidance’ emphasizing that banks are still free to deposit crypto or serve crypto clients. In reality, they are not free to do this in any way.”
Other recent regulatory events include a joint statement released on January 3 by the Fed, the FDIC and the Office of the Comptroller of the Currency (OCC) warning of the risks of banks dealing in crypto and urging them to refrain from doing so due to to “safety and soundness”. Also last month, Binance announced that it would only process fiat transactions over $100,000 due to a new Signature Bank policy.
In December 2022, Signature Bank announced its plans to reduce crypto services, return funds back to customers and close their accounts. The bank reportedly borrowed nearly $10 billion from the US Federal Home Loan Banks System in the last quarter of 2022 due to liquidity problems related to the bear market and crypto exchange FTX collapse.
“There is particular concern for crypto exchanges and related intermediaries operating outside the United States because their choice of jurisdiction usually focuses on maximizing profits, usually to the detriment of the customer,” Aaron Kaplan, CEO of blockchain fintech Prometheum and associate attorney. firm Gusrae Kaplan Nusbaum, told Cointelegraph. He explained:
“The banks are reassessing whether it is worth the risk to continue offering these services.”
Another priority for US regulators would be to ban crypto staking services for retail customers, Coinbase CEO Brian Armstrong commented on Twitter. Staking is a process that allows crypto investors to lock up crypto assets in a smart contract in exchange for rewards and passive income.
The US government’s techniques are not new. In 2013, a federal government regulatory initiative called Operation Choke Point targeted a number of “high-risk” industries, increasing oversight of financial institutions that provide services to these businesses.
Effects on Crypto Firms
The consequences for the crypto industry could range from reducing the ability of retail holders to exchange coins for USD, in addition to crypto exchanges closing operations in the US market and a lack of access to financial innovation, Carter said. He believes the move will see the crypto industry return to its former days:
“It’s a throwback to the ‘bad old days’ of 2014-16 when it was insanely difficult to get funds on exchanges. There are no positives from this.”
Kaplan believes that “the crypto-financial services ecosystem is evolving to align with established regulatory frameworks,” meaning companies in the space will need to “embrace regulation or perish.”
In contrast, Carter predicts that the initiatives will be unproductive for industry and retail investors, strengthen “shadow banks” and further delay development in the country. “They seem to think they can cut off crypto users’ access to ‘the next FTX’ by harassing banks. It’s not true – because blockchains and stablecoins already exist. They’re naive. The real goal is to stop the growth of crypto like they know how.”
The Federal Reserve and the Office of the Comptroller of the Currency did not immediately respond to Cointelegraph’s request for comment.
