Banks Pulling Out of Crypto Industry Amid Regulatory Uncertainty
The U.S. crypto industry is learning a hard lesson in regulatory compliance. In the past few months, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) have issued fines, cease and desist orders, and warnings to digital asset companies, causing traditional finance counterparties to withdraw from the industry. The conflict between regulators’ public messaging and their alleged behaviors has only further frustrated banks and crypto firms.
Signature Bank, one of the most active banks serving crypto clients, announced in December 2022 that it would refund clients’ monies, cancel their accounts, and scale out of digital assets. The bank was also forced to borrow almost $10 billion from the United States Federal Home Loan Bank System in the last quarter of 2022 due to liquidity concerns caused by the bear market and the collapse of FTX.
Banks are now wary of engaging in crypto activities due to the lack of faith in the crypto space from federal banking regulators. James Stevens, co-leader of the Financial Services Industry Group at Troutman Pepper, noted, “The federal banking regulators have now said, consistently across the board, that ‘We think it’s questionable whether crypto activities in the cryptocurrency space are safe and sound for banks.’”
The U.S. Congress, not the SEC or CFTC, will ultimately determine the regulatory framework for the cryptocurrency industry, as stated by important government bodies like the Financial Stability Oversight Council and the President’s Working Group on Financial Markets. However, given the ideological gap between House Republicans and Senate Democrats, a deal on crypto legislation seems unlikely.
Real-world use cases are essential for the success of cryptocurrency. Cross-border payments are currently hindered by the time-consuming and expensive process of currency conversion. Cryptocurrency has the capability to create a more expeditious and economical substitute to standard international monetary transactions, making it a worthwhile resource for companies and persons.
Given the novel and unprecedented activities associated with cryptocurrency, the Federal Reserve has elevated expectations for systems to monitor and control risks. Banks offering custody services for crypto-assets will have to demonstrate an effective control environment related to such activities.
While the SEC has taken an aggressive stance in pursuing the industry’s bigger players, settlements are not the law. Other companies may choose to fight the SEC’s enforcement actions.
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