US Regulator Halts Banks from Crypto Involvement But Stops Short of Total Ban

FDIC's Crypto Oversight Revealed Amid Ongoing Debate

Documents released on Friday shed light on the U.S. Federal Deposit Insurance Corporation's (FDIC) approach to crypto in 2022 and 2023, revealing that while it did not prohibit banks from providing banking services to cryptocurrency companies, it did advise caution on direct involvement with crypto assets.

This comes in response to growing complaints from the crypto industry about alleged "debanking" practices, where banks restrict or sever ties with crypto firms.

Regulatory Documents Offer Rare Insight

A judge ordered the FDIC to release supervisory letters, known as "pause letters," that it had sent to banks in the past.

The request followed a lawsuit by History Associates Incorporated, a research firm hired by crypto exchange Coinbase, which sought to gain access to the documents.

The FDIC initially released the letters in December, but was instructed by the judge to provide them with more specific redactions.

A new batch of 25 letters was released on Friday, including two additional letters not previously disclosed.

Industry Claims of a Coordinated Effort

Coinbase, which has long criticised the treatment of crypto firms by U.S. regulators, views the documents as confirmation of a concerted effort to shut down crypto activity.

Coinbase’s Chief Legal Officer, Paul Grewel, said in a post on X,

"They show a coordinated effort to stop a wide variety of crypto activity."

He called for further investigation into the matter by Congress, aiming to address what he described as regulatory overreach.

FDIC's Stance on Crypto Risks

The FDIC has consistently stated that it has not ordered banks to cut off access to traditional banking services for crypto firms, such as deposit accounts or lending.

However, it has expressed concern about the risks associated with banks directly engaging in crypto-related activities.

An internal memo from 2022, released alongside the letters, clarifies the FDIC's stance on the matter.

The memo distinguishes between banks offering traditional banking services to crypto firms and banks directly participating in crypto activities, such as holding crypto assets in custody.

The latter, according to the FDIC, requires more stringent scrutiny due to concerns over safety, soundness, consumer protection, and financial stability.

Supervisory Pause: Not a Complete Ban

The documents reveal that while the FDIC took a cautious approach, it did not mandate that banks sever ties with crypto firms entirely.

Instead, FDIC examiners urged banks to pause their involvement in crypto ventures or refrain from expanding their crypto-related services.

In some instances, the FDIC required banks to answer detailed questions before proceeding with further crypto activities.

A memo detailing how FDIC supervisors should assess queries from banks looking to engage with crypto further underscores the agency's focus on ensuring that banks' crypto activities do not pose significant risks to the broader financial system.

The memo reads:

"Crypto-related activities may pose significant safety and soundness and consumer protection risks, as well as financial stability concerns."

These risks, the FDIC notes, are still "evolving."

Potential Shift in Policy as New Administration Approaches

The release of these documents comes at a pivotal time, with President-elect Donald Trump's administration set to take office later this month.

Donald Trump will return to office as the 47th president of the United States on 20 January.

Trump is expected to issue an executive order that could direct regulators to ease their stance on crypto.

Industry leaders are hopeful that the new administration will adopt a more supportive approach, potentially offering clearer guidance and a more balanced regulatory environment for the crypto sector.

The ongoing debate highlights the tension between the fast-growing crypto industry and regulators striving to balance innovation with risk management.

As the Biden administration prepares to hand over power, it is uncertain how future regulatory approaches will impact cryptocurrency businesses in the U.S.