United States authorities appear to be resurrecting past techniques to crack down on crypto firms and banks offering services to the industry, several sources told Cointelegraph.
The alleged strategy consists of isolating the traditional financial system from the crypto market by relying on “multiple agencies to discourage banks from dealing with crypto firms,” with the goal of leading crypto businesses to become “completely unbanked,” according to Nic Carter — co-founder of venture firm Castle Island and crypto intelligence firm Coin Metrics.
The claims rely on conversations Carter had with bank executives, including crypto-native and traditional banks, he told Cointelegraph. “They tell me they are facing immense pressure from the Fed [Federal Reserve] and FDIC [Federal Deposit Insurance Corporation]. Founders are telling me that they can’t get bank accounts anywhere for new startups.” According to Carter:
“Regulators threaten and bully bank leadership behind the scenes, then publish public ‘guidance’ stressing that banks are still free to custody crypto or service crypto clients. In reality, they’re not free to do this, by any means.”
Other recent regulatory events include a joint statement released on Jan. 3 by the Fed, the FDIC and the Office of the Comptroller of the Currency warning about the risks of banks engaging in crypto and encouraging them to refrain from doing so due to “safety and soundness” concerns. Also last month, Binance announced that it would only process U.S. dollar 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 to customers and close their accounts. The bank reportedly borrowed nearly $10 billion from the U.S. Federal Home Loan Bank System in the last quarter of 2022 due to liquidity issues related to the bear market and the collapse of crypto exchange FTX.
“There is particular concern with crypto exchanges and related intermediaries that operate outside of the United States because their choice of jurisdiction usually focuses on maximizing profit, usually to the detriment of the customer,” Aaron Kaplan, co-CEO of blockchain fintech Prometheum and counsel at law firm Gusrae Kaplan Nusbaum, told Cointelegraph. He explained:
“Banks are reevaluating whether continuing to provide these services is worth the risk.”
Another priority for U.S. regulators is apparently 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 crypto assets into a smart contract in exchange for rewards and passive income.
1/ We're hearing rumors that the SEC would like to get rid of crypto staking in the U.S. for retail customers. I hope that's not the case as I believe it would be a terrible path for the U.S. if that was allowed to happen.— Brian Armstrong (@brian_armstrong) February 8, 2023
The U.S. authorities’ techniques are not new. In 2013, a federal government regulatory initiative called Operation Choke Point targeted a variety of “high-risk” industries and heightened supervision of financial institutions providing services to these businesses.
Impacts on crypto firms
The consequences for the crypto industry could range from reducing retail holders’ ability to exchange coins for the dollar in addition to crypto exchanges closing operations in the U.S. market and a lack of access to financial innovation, said Carter. He believes the move would lead the crypto industry to return to earlier days:
“It’s a return to the ‘bad old days’ of 2014–16 when getting funds on exchanges was insanely difficult. There are no positives from this.”
Kaplan believes that the “crypto financial services ecosystem is evolving to come in line with established regulatory frameworks,” meaning that companies in the space will need to “embrace regulation or perish.”
In contrast, Carter predicts that the initiatives will be unproductive for the industry and retail investors, empowering “shadow banks” and further delaying its development in the country. “They seem to believe that they can cut off crypto users’ access to ‘the next FTX’ by harassing banks. That’s not true — because blockchains and stablecoins already exist. They are naive. The real objective is to stem the growth of crypto any way they know how.”
The Federal Reserve and the Office of the Comptroller of the Currency did not immediately respond to Cointelegraph’s request for comments.