Illustration of the Capitol building with a sign reading "Crypto" stuck in the top
Illustration: Christopher T. Fong/Protocol

Banking's role in crypto is coming under new scrutiny

Protocol Fintech

Well hey there, and welcome to Protocol Fintech. This Thursday: Warren and Sanders target crypto bank rules, another Coinbase investigation is underway and the CFPB fines a personal finance app.

Assessing the risk

A group of progressive lawmakers led by Sen. Elizabeth Warren is calling on the Office of the Comptroller of the Currency to withdraw legal guidance that allows chartered banks to make some forays into crypto.

The request — detailed in a Wednesday letter — highlights an ongoing debate in crypto. Some banking industry groups say the regulated institutions can bring stability to the volatile sector. But the lawmakers fear that without strict guardrails, crypto could introduce systemic risk to the broader banking system.

The guidance dates back to the final months of the Trump administration. Signed in late 2020 and early 2021, it gives nationally chartered banks clearance to provide crypto custody service, hold cash reserves backing stablecoins and use blockchain technology to verify bank-to-bank payments.

  • “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,” says the letter, also signed by Sens. Bernie Sanders, Sheldon Whitehouse and Dick Durbin.
  • The guidance should be replaced by a process “that adequately protects consumers and the safety and soundness of the banking system," according to the letter.
  • The OCC's current leader, Michael 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 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.

Banking industry groups say lawmakers are focusing their energy in the wrong place. Before the senators' letter was published Wednesday, the American Bankers Association made a separate argument to the Treasury Department that well-regulated banks are being kept from the space, while other companies operate with little oversight.

  • "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," said Brooke Ybarra, senior VP of innovation and strategy at the American Bankers Association.
  • The senators' letter cited the bankruptcies of firms Celsius and Voyager, which ran crypto-lending businesses that operated outside of the OCC’s purview.
  • "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," said Georgia Quinn, general counsel for Anchorage Digital, a crypto custodian with an OCC charter.

Warren certainly has not opposed the idea of stricter regulation for the rest of the crypto industry. But in the meantime, the letter says, lawmakers need "to mitigate crypto’s risks to the financial system and consumers."

  • Consumer-focused groups share the concern.
  • "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," Hays added.

The lawmakers want regulators to put their heads together for a better plan. 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 OCC declined to comment on the letter directly, instead sharing previous comments from Hsu describing the agency’s “careful and cautious” approach to crypto. Hsu defended the agency's approach last week to Bloomberg, which first reported that Warren was circulating the letter within the banking committee. “I think we’re doing a pretty good job," Hsu told the outlet. "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."

A version of this story appeared on Protocol.

— Ryan Deffenbaugh (email | twitter)


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On the money

On Protocol: Coinbase said the SEC is looking into different aspects of the crypto company’s business, including “existing and intended future products.”

Ripple is eyeing Celsius’ assets. A company spokesman told Reuters that it may bid for the assets of the crypto lender, which filed for bankruptcy last month.

Hedge funds may soon report digital asset exposure. A Securities and Exchange Commission proposal would require large hedge funds to report their cryptocurrency exposure through a confidential filing known as Form PF.

A top-ranking Democrat is seeking stiffer penalties for Equifax. Rep. Maxine Waters, chair of the House Financial Services Committee, asked the Consumer Financial Protection Bureau to stop Equifax from selling credit scores to lenders until the credit-reporting firm can prove it has the controls in place to ensure its scores are correct.

Crypto exchange CoinFlex has filed for restructuring in a Seychelles court. The company said it’s attempting to resolve a shortfall due to a counterparty failing to make a margin call.

State bank regulator releases guide to cybersecurity exams. The Conference of State Bank Supervisors released new tools for nonbank financial services companies to prepare for cybersecurity exams conducted by regulators.

CFPB fines Hello Digit for faulty personal finance app

The CFPB said Wednesday it imposed a $2.7 million fine on Hello Digit, an app that claims to help users put aside money for rainy days but that the regulator said messed up their finances. The regulator said Hello Digit, which was acquired by Oportun Financial Corporation in 2021, used a “faulty algorithm” that led to “overdrafts and overdraft penalties for customers."

In addition to the fine, Hello Digit was ordered to pay redress to affected customers. An Oportun spokesperson said a company investigation found that the Hello Digit app’s “success rate” was “better than 99.99%.”

“While we disagree with the CFPB on this matter, we are happy to have it settled,” the company said.

Read the full story on Protocol.

— Benjamin Pimentel (email | twitter)

Moves and hires

Danny Greene has joined Yuga Labs as a brand lead for the Meebits NFT collection. Greene was most recently the GM of the MeebitsDAO.

Bryan Zhang has been named chair of a U.K. working group focused on open banking. Zhang is co-founder and executive director of the Cambridge Centre for Alternative Finance at the University of Cambridge Judge Business School.

David Sinsky has joined banking-as-a-service company Unit as vice president of lending. Sinsky was previously director of product, new products, at Opendoor.

Lauren Hargraves and Bryan Hubbard joined the advisory board of digital asset firm Metallicus. Hargraves was a Federal Reserve banker, and Hubbard previously worked at the Office of the Comptroller of the Currency.


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