Last week, the Board of Governors of the Federal Reserve issued a supervisory letter that offers guidance to any banks that are currently engaged in crypto activities or planning on launching a crypto service in the near future. In April of this year, the Federal Deposit Insurance Corporation (FDIC) issued a similar letter to the state non-member banks under its supervision as well. Finally, in November of 2021, the Office of the Comptroller of the Currency (OCC) issued an Interpretive Letter 1179 that cemented the precedent that permissible banking activities involving crypto would be allowed as long as the bank informed the regulator and received a ‘non-objection’ letter.
As the vast majority of banks in the U.S. hold either a federal charter and are regulated by the OCC, or a state charter that is either a ‘member’ bank supervised by the Fed or a ‘non-member’ bank that by default is supervised by the FDIC, this move is indicative of consistency and clarity as to the manner by which these financial institutions can receive approval to offer crypto products or services.
Keith Noreika, Executive Vice President at Patomak Global Partners and former Acting Comptroller of the Currency, highlighted in an interview that, “Clarity from the Federal Reserve for how member banks should approach permissible crypto activities is a welcome development, particularly when political winds are blowing the other direction.” Regulators such as the Securities and Exchange Commission (SEC) and the Office of Foreign Assets Control (OFAC) have recently issued complaints, cease-and-desist notices, and sanctions that seem to have left the crypto community uncertain and unstable in how to act in a regulatory compliant manner.
“You need that trifecta of regulatory clarity. We need those three federal bank regulators to act in unison, otherwise the banks can’t really operate in the space,” said Jamison Sites, Financial Services Senior Analyst at RSM. As the OCC started the trend by originally providing the interpretations necessary for federal banks to engage in certain types of crypto activities, it resulted in a push toward the regulators of state-chartered institutions similarly providing a process for engaging in crypto. Sites highlighted that, “Anything a federal bank does, a state bank can generally do.”
If there is anything that an industry does not like, it is regulatory uncertainty. “At this point in the evolution of cryptocurrency and blockchain analysis, we need all regulators moving toward greater clarity for the market and consumers to realize the full positive potential of these innovations,” said Noreika.
With the Office of Foreign Assets Control (OFAC) sanctioning Tornado Cash, a smart contract for cryptocurrency mixing, a first for sanctions enforcement where the sanction was not against a person or a business entity, problematic questions have come up from thought leaders in the industry. that forces a discussion between a need for national security and personal privacy rights. Similarly, the crypto community is still reeling from another first where the Securities and Exchange Commission (SEC) against an ex-Coinbase employee and two of his associates who are accused of conducting insider trading by their interactions with nine crypto assets that were labeled as ‘crypto asset securities’.
From the actions of other regulators, whether by design or not, there is a sense of instability within the crypto industry at a time when recent market events already have created a bearish sentiment over the last several months. That banks, arguably the most tightly regulated in the U.S., have a way forward within the guidelines of safety and soundness is at least a step in the right direction where there is at least a roadmap now for how to be compliant with crypto in the banking system.