Financial regulators are sending a stern message to banks interested in cryptocurrency: proceed with caution. In recent speeches, guidance, and policy statements, the agencies have made their stance on digital assets clear: they pose a risk to the banking system, and banks should be wary of getting involved.
Though specific rules have not yet been issued, experts told S&P Global Market Intelligence that the regulators have made their views known. As a result, the majority of banks are being hesitant and staying away from crypto activities.
James Stevens, co-leader of the Financial Services Industry Group at Troutman Pepper, said, “The federal banking regulators have consistently said ‘We think it’s questionable whether crypto activities in the cryptocurrency space are safe and sound for banks. We’re not saying never, we’re not saying impossible, but we’re saying it’s a very, very high bar.’”
Agencies Unite
The regulators have provided guidance on banks’ involvement in crypto for some time, but following recent events, the agencies are now working together to ramp up their efforts. Most recently, Federal Reserve Governor Christopher Waller warned banks to look out for the risks associated with crypto.
Waller said, “Banks considering engaging in crypto-asset-related activities face a critical task to meet the ‘know your customer’ and ‘anti-money laundering’ requirements, which they in no way are allowed to ignore. A bank engaging with crypto customers would have to be very clear about the customers’ business models, risk-management systems and corporate governance structures to ensure that the bank is not left holding the bag if there is a crypto meltdown.”
The Fed, the FDIC, and the Office of the Comptroller of the Currency have all separately instructed banks to disclose their crypto activities, with the OCC requiring companies to get a “non-objection” letter before engaging in certain activities. Additionally, in a policy statement in January, the Fed said both insured and uninsured banks would be subject to limits on certain activities, such as those related to crypto-assets.
The fact that the agencies are now taking coordinated action to address their concerns is significant, and the White House announced the need to separate digital assets from the banking system. This shows how seriously regulators are taking the issue.
What Do Banks Do Now?
Regulators have made it clear that they view digital assets as a danger to banking safety, but it remains unclear what they will allow banks to do with cryptocurrency in the future.
Joseph Castelluccio, co-leader of Mayer Brown’s Fintech and Digital Assets, Blockchain & Cryptocurrency groups, said, “There’s always hope that even careful permissibility of some of these activities is going to be allowed. But given the tone of both the statement the Fed made most recently and other actions related to the crypto sector, that type of reading between the lines on permissible activities isn’t where we should be at this point.”
Cliff Stanford, a corporate and finance partner at Alston & Bird, said some banks may decide to leave the digital asset market completely, while others may still pursue a strategy in the space by working with regulators.
Stanford said, “I do think there are business opportunities for banks to do things in that space that are legally permissible and can be done in a safe and sound environment. Some will say, ‘That’s too hot to touch. I’m gonna stay away from it. Some will say ‘I need to keep a toe in that water, I’ve got a real business strategy and I want to pursue it.’”
With the tightening of regulations, one industry expert told S&P Global Market Intelligence that formal rules or examination guidelines are unlikely to be proposed soon, given the rapid changes in the space.
Dan Stipano, a former top OCC attorney and now a partner with Davis Polk, said, “Regulators will continue to be vigilant in this space. I am doubtful that a special [compliance] framework or exam procedures for crypto will be developed in the near term.”
Troutman Pepper’s Stevens concluded, “I don’t expect any bank to get involved in cryptocurrency activities in the near future.”
