The Fed is working on crypto’s on-ramps

To regulate the pirates, cut off access to their ports and see how long they last at sea. It is the playbook used in the US to rid the scourge that is also crypto, or so it seems.

Why it’s important: For crypto, banks are its ports – important on- and off-ramps for dollars to move on the chain. But banks cannot hold crypto as principal, the Fed’s board said in a bulletin that took effect last week.

The big picture: “The Fed says we don’t want an express connection between the US banking system and [the] crypto economy,” Steven Kelly, a senior fellow at the Yale Program on Financial Stability, told Axios.

• “For me to send dollars to anybody, even in bitcoin, my bank is involved,” Kelly says, so discouraging banks from doing crypto business would certainly be a “chokepoint.”
• Kelly objected to the characterization of the latest action by the Fed — long wary of crypto — as a “crash,” comparing it instead to “plugging a hole” in previously provided guidance.

What others are saying: For Castle Island Ventures’ Nic Carter, however, this guidance, as well as a number of other actions taken by federal authorities recently, is evidence of what he considers a coordinated attack on crypto that he dubbed “Operation Chokepoint 2.0.”

• The name nods to a controversial Obama administration-era strategy that discouraged banks from offering services to “risky” businesses such as payday lenders and arms dealers — an effort meant to uncover fraud and bad actors.

Status: The Securities and Exchange Commission has been filing complaints against crypto firms lately, and seems to be dropping more.

• Meanwhile, the ripple effects of an icier stance by the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC) and even the White House are beginning to show.

Details: Crypto-serving institutions like Signature Bank said it would scale out of digital assets. One of its main customers, crypto exchange Binance, stopped fiat withdrawals last week while it sought a new banking partner.

• Custodia Bank’s application for access to the Fed’s rails was denied after months of waiting, and others are rethinking their pursuit of their own.

Of note: It started a churn in the rumor mill: the OCC was said to have asked others – including Paxos and Protego Trust which had been operating on conditional charters – to withdraw their pending applications.

• “Regarding Paxos and Protego, please note that the OCC does not comment on pending applications,” an OCC spokesperson said in an emailed response to Axios last week.

Catch up quickly: Paxos, the white-label stablecoin issuer behind Binance’s BUSD, was today ordered to stop minting them. Paxos has not addressed an earlier report that the firm was served with a Wells notice from the SEC over a possible securities offering violation.

The bottom line: There is no express ban on crypto, but it doesn’t have to be.