Banks under pressure from US authorities to cut ties with crypto firms

United States authorities appear to be reviving past techniques to crack down on crypto companies and banks that provide services to the industry, several 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 dealing with crypto firms,” with the goal of getting crypto firms to “become completely bankless,” according to Nic Carter – co-founder of venture capital firm Castle Island and crypto intelligence firm Coin Metrics.

The claims are based on conversations he had with bank executives, including crypto-native and traditional banks, Carter told Cointelegraph. “They tell me they are under tremendous pressure from the Fed [Federal Reserve] and 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 leaders behind the scenes, then publish public ‘guidelines’ emphasizing that banks are still free to hold crypto or serve crypto customers. In reality, they are in no way free to do so .”

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 faced by banks engaging in with cryptocurrencies and encourages them to refrain from doing so due to “security and soundness” concerns. Also, Binance announced last month that they 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, refund 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 issues related to the bear market and the collapse of the crypto exchange FTX.

“There is particular concern about crypto exchanges and related intermediaries operating outside the United States, as their choice of jurisdiction tends to focus on maximizing profits, usually to the detriment of the client,” Aaron Kaplan, CEO of blockchain fintech Prometheum and law firm Gusrae Kaplan Nusbaum, Cointelegraph told. He explained:

“Banks are re-evaluating whether it is worth the risk to continue providing these services.”

Another priority for US regulators would be to ban crypto staking services for retail customers, Coinbase CEO Brian Armstrong noted 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 are hearing rumors that the SEC wants to abolish US crypto strike for retail clients. I hope that’s not the case because I believe it would be a terrible path for the US if that happened.

— Brian Armstrong (@brian_armstrong) February 8, 2023

The techniques of the US authorities are not new. In 2013, a federal government regulatory initiative called Operation Choke Point targeted a variety of “high-risk” industries, tightening oversight of financial institutions that provide services to these companies.

Implications for crypto companies

The impact on the crypto industry could range from reducing retailers’ ability to convert coins to the USD, in addition to closing crypto exchanges in the US market and a lack of access to financial innovation, Carter said. He believes the move would return the crypto industry to earlier days:

“It’s a throwback to the ‘bad old days’ of 2014-2016 when it was insanely hard to get money on exchanges. There are no positives to this.”

Kaplan believes that the “financial services crypto ecosystem is evolving to align with established regulatory frameworks,” meaning companies in the space will have to “embrace or perish by regulation.”

In contrast, Carter predicts the initiatives will be unproductive for industry and private investors, strengthening “shadow banks” and further slowing their development in the country. “They seem to believe that they can cut off crypto users’ access to “the next FTX” by harassing banks. That is not true, because blockchains and stablecoins already exist. They are naive. The real goal is to halt the growth of crypto the 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 comment.