Banking regulators' recent speeches, guidance and policy statements have made their stance on cryptocurrency clear: digital assets are a threat to the safety and soundness of the banking industry, and banks should proceed with caution.
Though the agencies have yet to issue formal, proposed rules regarding banks' involvement in crypto activities, industry experts told S&P Global Market Intelligence that regulators have made their opinions clear. Over the past few years, and especially in recent months following the recent volatility of the crypto space, regulators have signaled that digital assets pose a risk to the safety and soundness of the banking system. As such, most banks are taking the cues they have received and are hesitant to play in that space, attorneys and analysts told S&P Global Market Intelligence.
"The federal banking regulators have now said, consistently across the board, that 'We think it's questionable whether crypto activities in the cryptocurrency space are safe and sound for banks,'" said James Stevens, co-leader of the Financial Services Industry Group at Troutman Pepper. "'We're not saying never, we're not saying impossible, but we're saying it's a very, very high bar.'"
Agencies team up
Regulators have provided some guidance regarding banks' involvement in crypto in recent years, but following the fallout of crypto companies such as FTX Trading Ltd. and the subsequent impact to the overall crypto industry, the agencies are increasingly working together to ramp up their efforts to provide guidance.
Most recently, Federal Reserve Governor Christopher Waller sent a sharp warning to banks interested in engaging in cryptocurrency activities.
"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," Waller said in a Feb. 10 speech. "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."
Waller's comments come after a yearlong stretch of actions tightening regulatory oversight of banks' participation in the crypto market. In January, the Office of the Comptroller of the Currency, the Fed and the Federal Deposit Insurance Corp. teamed up to caution banks in a joint statement that many crypto activities are "highly likely to be inconsistent with safe and sound banking practices."
Prior to the joint statement, the FDIC, the OCC and the Fed have all separately instructed banks to fully disclose their crypto activities and work with the agencies on any progress forward, with the OCC requiring companies to get a "non-objection" letter before engaging in certain activities.
In a separate policy statement Jan. 27, the Fed said both insured and uninsured banks will be subjected to limits on certain activities, including those associated with crypto-assets.
The fact that financial agencies now are moving together to address their crypto concerns is significant, attorneys told S&P Global Market Intelligence. It also is noteworthy that the White House announced Jan. 27 the culmination of an administrationwide, yearlong focus on mitigating cryptocurrency risks, noting "the imperative of separating risky digital assets from the banking system."
How do banks proceed?
Regulators' speeches and guidance have indicated that they feel digital assets are a threat to the safety and soundness of banks, but it remains unclear how much they will allow banks to be involved with cryptocurrency moving forward.
"There's always hope that even careful permissibility of some of these activities is going to be allowed," said Joseph Castelluccio, co-leader of Mayer Brown's Fintech and Digital Assets, Blockchain & Cryptocurrency groups. "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."
Facing the tougher regulatory environment regarding crypto, some may decide to exit the digital asset market altogether, while others could still devote energy to working with regulators, said Cliff Stanford, a corporate and finance partner at Alston & Bird.
"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," Stanford said. "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.'"
However, there is "no doubt the bar has been raised for getting regulatory consent," he added.
Regulators will continue to keep a sharp eye on crypto activities, but in a new and rapidly changing sphere, formal rules or examination guidelines are unlikely to be proposed soon, one industry expert told S&P Global Market Intelligence.
"Regulators will continue to be vigilant in this space," said Dan Stipano, a former top OCC attorney and now a partner with Davis Polk. However, "I am doubtful that a special [compliance] framework or exam procedures for crypto will be developed in the near term," given how fast the space is changing, Stipano said.
With the uncertain horizon, "I don't expect any bank to get involved in cryptocurrency activities in the near future," Troutman Pepper's Stevens said.
