Fintech

A shake-up could be coming for banks working with crypto

The OCC is facing calls to pull guidance allowing banks to conduct some crypto-related business.

An illustration of the Capitol building with a sign reading "Crypto" stuck in the top

Lawmakers including Sens. Elizabeth Warren and Bernie Sanders fear crypto could introduce systemic risk to banking without strict guardrails.

Illustration: Christopher T. Fong/Protocol

As efforts to pass federal crypto legislation are maybe, finally picking up steam in Washington, so, too, is the debate about how traditional banks should approach the sector.

A group of progressive senators including Elizabeth Warren and Bernie Sanders are calling on a federal banking regulator to pull Trump-era guidance that gives banks limited clearance to engage in crypto-related business.

In a Wednesday letter addressed to the Office of the Comptroller of the Currency, the senators pushed forward an ongoing debate over the role banks should play in the crypto ecosystem. Banking industry groups say the regulated institutions can bring stability to the volatile sector. But the lawmakers fear crypto could introduce systemic risk to the broader banking system without strict guardrails.

“In light of recent turmoil in the crypto market … we are concerned that the OCC’s actions on crypto may have exposed the banking system to unnecessary risk,” reads the letter, which was also signed by Sens. Sheldon Whitehouse and Dick Durbin.

Warren circulated a draft version of the letter within the Senate Banking Committee last week, as first reported by Bloomberg and American Banker. The letter calls on the regulator to withdraw previous guidance and start a more comprehensive process “that adequately protects consumers and the safety and soundness of the banking system.”

The OCC's current guidance was published in late 2020 and early 2021. It gives federally chartered banks clearance to provide crypto custody service, hold cash reserves backing stablecoins and use blockchain technology and stablecoins to verify bank-to-bank payments.

When asked about news reports on the letter, an OCC spokesperson on Tuesday sent Protocol previous comments from acting OCC head Michael Hsu describing the agency’s "careful and cautious" approach to crypto.

Hsu defended the agency’s approach in a comment to Bloomberg when the outlet reported, on Aug. 3, that Warren was circulating a letter calling for the OCC to pull the guidance.

“I think we’re doing a pretty good job. See exhibit A: a whole bunch of stuff just happened, and the banking system is in pretty good shape, knock on wood. I think part of that is the actions we’ve taken,” Hsu told Bloomberg.

The senators cited the bankruptcies of firms Celsius and Voyager, which ran crypto-lending businesses that operated outside of the OCC’s purview. Still, the bankruptcies make “clear that stronger protections are necessary to mitigate crypto’s risks to the financial system and consumers,” the letter reads.

Hsu is a self-described crypto skeptic and promised to review the crypto-related guidance when he took leadership of the OCC in May 2021. The guidance was published under Hsu’s predecessor, Brian Brooks, who is now CEO of crypto company BitFury.

The agency said in November it would keep the provisions in place, with the added caveat that banks must apply to the OCC for a non-objection before engaging in any crypto activity.

But, in the senators’ view, that change does not go far enough.

Inaction vs. limitation

A banking industry trade group recently argued that limiting banks’ participation in crypto is counterproductive to protecting consumers. A Monday letter from the American Bankers Association to the Treasury Department noted banks are facing restrictions that mostly keep them out of digital assets, while there is still little regulation for non-banks involved in crypto.

"The combination of these two approaches — inaction on the one hand to bring into the regulatory perimeter non-bank crypto companies, and limitation on the other of banks’ ability to engage responsibly in the digital asset market — creates an environment that makes it nearly impossible for responsible financial innovation to occur in this space," wrote Brooke Ybarra, senior VP of innovation and strategy at the ABA.

The association was responding not to Warren and Sanders’ letter, but to a comment process the Treasury launched in July. The department sought input on, among other things, crypto's potential impact on markets and major financial institutions, as directed by President Joe Biden's executive order in March. Biden’s order is built around the idea that the U.S. needs to take a “whole-of-government” approach to regulating crypto.

Banks are not a monolith, and some are more skeptical of crypto than others. Some institutions have explored using blockchain technology for things like settling money transfers. Some are providing services holding custody of crypto assets or customer cash for crypto companies.

OCC-chartered crypto custodian Anchorage Digital said that lawmakers should be focused on bringing more crypto businesses within view of regulators, when asked about the letter.

"If we truly want to protect consumers, we need to pave a workable path forward for regulated institutions to provide crypto services, which was the very intent of the OCC’s guidance," Anchorage general counsel Georgia Quinn told Protocol.

Warren has certainly voiced support for bringing stricter regulation to crypto as a whole. But consumer protection groups, which generally align with Warren, have flagged crypto's entry into the traditional banking system as being of particular concern. They say there needs to be clarity beyond the current guidance.

"We don't really know much about how exposed banks are to crypto risks or how regulators are weighing in," said Mark Hays, a senior policy analyst on fintech at Americans for Financial Reform. "Given the recent crash, we should, and it would be better if regulators started from first principles and applied the full suite of banking regulations from the outset rather than take the ‘maybe, maybe not’ approach currently in play. "

What's next

The senators’ letter calls on the OCC to take up a new process with the Federal Deposit Insurance Corp. and Federal Reserve to clarify how the banks they oversee can engage with crypto. The letter also includes a series of questions about how many OCC-regulated banks are engaging in crypto activities.

The OCC, FDIC and Federal Reserve released a joint statement late last year promising further clarity would come for banks on crypto in 2022 — but guidance since then has been limited. The FDIC recently put out a statement warning banks they must monitor how the crypto firms they partner with advertise the availability of deposit insurance. That concern, plus Warren and Sanders’ attention, could be a signal of additional action coming.

Along with Biden's executive order, there are several bills aimed at regulating various parts of the industry in the Senate, including one filed in early August that would give the Commodity Futures Trading Commission larger oversight of the industry. While the banking industry is not the focus of those bills, they could help influence how bank regulators approach crypto.

"Just having clarity between what's a security token and a non-security token would be very helpful," said Gary DeWaal, chair of Katten Muchin Rosenman LLP’s financial markets and regulation practice. "Over time, once you have a key regulator and in place at the federal level, you'll have better standards on custody, better standards on cybersecurity — that will benefit the banking regulators, too."

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