United States bank regulators’ posture on digital assets is increasingly one of “prove it” pressure.
This, as Federal Reserve Chairman Jerome Powell Tuesday (March 7) re-emphasized his earlier stern warnings around cryptocurrencies during his agency’s semi-annual monetary report to the U.S. Senate Banking Committee.
In today’s post-FTX landscape, nearly all of the key federal bureaus are decidedly wary of giving the crypto industry any onramps to the traditional financial sector.
Powell’s speech before Tuesday’s committee of lawmakers offered little in the way of a silver lining.
“We’ve seen just a remarkable set of events in the crypto space,” he said. “…We’re watching what’s been happening, and what we see is quite a lot of turmoil, we see fraud, we see a lack of transparency, we see run risk.”
Powell was asked to address cryptocurrency issues several times during his testimony, which primarily centered around employment, consumer spending, manufacturing production, and inflation.
Powell pointed to multiple industry collapses beyond the FTX exchange and several high-profile instances of fraud to illustrate “that regulated financial institutions should be quite cautious in doing things in the crypto space.”
“We have to be open to the idea that — somewhere in there — there is technology that can be featured in productive innovation that makes people’s lives better … we don’t want to stifle innovation,” Powell told the committee members, adding that he would welcome Congress stepping in with a new “workable legal framework” for the crypto industry.
Powell also suggested that a place exists for stablecoins in the traditional financial sector, but cautioned that it would require “appropriate regulation,” and highlighted “real concerns” around “permissionless public blockchains, and the reason is that they’ve been so susceptible to fraud, to money laundering and all of those things.”
Crypto crime hit an all-time high of $20.6 billion last year, and that’s a “lower bound” estimate.
Over 40% of 2022’s crypto transaction volume flowed in some way through sanctioned entities — the exchanges and the individuals and services targeted by the Office of Foreign Assets Control (OFAC) — that lie behind hacking, ransomware, drug trafficking, money laundering and terrorist financing, underscoring the glaring inability, or unwillingness, of crypto’s current system to flag and stop illicit activity.
Read more: Can Crypto’s Value Proposition Ever Translate Into Real Value?
Powell’s Fed, along with the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) together issued a statement at the start of the year saying that, “It is important that risks related to the crypto-asset sector that cannot be mitigated or controlled do not migrate to the banking system.”
The regulators specified that crypto-focused banks likely would not be able to successfully meet baseline safety and soundness standards for being able to continue to operate in the U.S.
Only about 10% of financial institutions offer enterprises access to crypto, but three-quarters indicated at least some plans to do so.
Silvergate Bank, a former favorite of FTX and a perennial caterer to the crypto industry, has been serving as a real-time example of the dangers the regulators highlighted of mixing crypto with traditional banking services.
Silvergate’s exposure to the crypto sector has proved to be disastrous for its business prospects, and the bank’s ability to operate is now under question, as most of its crypto customers have withdrawn their deposits from the institution.
The bank is reportedly meeting with FDIC officials in order to find a way to avoid shutting down.
The problems at Silvergate risk leaving crypto companies, already lacking liquidity, without a place to park their cash, which could have widespread ramifications throughout the digital asset landscape.
U.S.-based cryptocurrency exchange Kraken, which was recently slapped with a multimillion-dollar fine by the Securities and Exchange Commission (SEC), has plans to fix this by launching its own crypto-focused bank.
Called Kraken Bank, the yet-to-be-launched financial institution would exist under a Special Purpose Depository Institution Bank (SPDI) charter in the state of Wyoming. Kraken has already received the charter but has yet to launch the business.
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