Make Kitco Your Homepage

Senators say regulators are 'de-banking' the crypto sector in America

Kitco News

Editor note Get all the essential market news and expert opinions in one place with our daily newsletter. Receive a comprehensive recap of the day's top stories directly to your inbox. Sign up here!

(Kitco News) - Amid the worst banking crisis since 2008, four Republicans in the U.S. Senate, led by Senator Bill Hagerty (R-TN), have written a letter to the heads of several federal banking regulatory agencies asking them to explain the coordinated effort to crack down on crypto-related banking providers in recent months.

The letter was addressed to Federal Reserve Chair Jerome Powell, Federal Deposit Insurance Corporation (FDIC) Chair Marty Gruenberg, and Office of the Comptroller of the Currency (OCC) Chair Michael Hsu, seeking further insights into recent statements made by the banking regulators that have called for heightened supervision of crypto-related activities.

“These releases have caused banks to reevaluate their decision to provide banking services to the crypto sector, resulting in crypto firms’ bank accounts being unexpectedly closed,” the Senators wrote. “This coordinated behavior seems disturbingly reminiscent of Operation Choke Point… an Obama Administration initiative where federal regulators applied pressure on financial institutions to cut off financial services to certain licensed, legally operating industries simply because certain regulators and policymakers disfavored those industries.”

The result of an investigation into Operation Choke Point found that businesses were illegally targeted by government officials, and the FDIC was forced to take steps to clarify that banks are allowed to provide services to legal businesses and provide enhanced training to its examiners.

“Unfortunately, nearly four years after the enhanced training, banking regulators seem to be reverting to old practices,” the letter said. “Even if the actions towards the crypto economy emanate from different regulatory concerns – it appears that the desired outcome from the banking regulators is similar to that of Operation Choke Point – the de-banking of the crypto industry in America.”

The Senators acknowledged the struggles that the crypto industry has faced over the past year and a half which “unearthed some problematic vulnerabilities for the crypto industry,” but said, “the problems of the few should not drive the harm of many.”

They likened attempts to cut off the crypto industry from banking because of the actions of a few bad actors to cutting off access to other asset managers because the Bernie Madoff fraud occurred.

“Regulators should not be punishing an entire industry; rather, the banking regulators should be working to provide updated guidance and proposed rules for public comment so that lawful businesses can have access to banking services and so that banks wishing to engage in issuing or holding principal cryptoassets have clear rules to follow,” they wrote. “Doing so would be consistent with the federal bank regulator’s mandate of articulating what “safe and sound” banking practices are.”

The letter declared that the current approach adopted by the banking regulators is not consistent with this mandate and will result in risks being pushed out of the regulated system. The real concern voiced by the Senators is that this overreach by banking regulators could eventually spread to other industries if left unchecked.

“Any industry could be potentially “disfavored,” based on a given regulator’s ideological perspective,” they wrote. “Banks have a mission of protecting safety and soundness, not selecting winners and losers based on the partisan or ideological whim of a regulator.”

To help address these concerns, the Senators put forward a list of questions for the regulators to answer, including a justification for how the heightened scrutiny over crypto-related firms helps protect customers, whether it is possible for banks to provide services to crypto firms at all under the updated guidance, and whether the agencies plan to release similar guidance for other industries.

Metropolitan Commercial Bank to end its crypto-related services

This development comes at a pivotal time for crypto banking as multiple firms have had to close up shop in recent days. On Wednesday, crypto-focused Silvergate Bank announced that it would be winding down its operations after the losses it incurred as a result of the bankruptcy of FTX.

And earlier on Friday, the FDIC announced that it would be taking over Silicon Valley Bank – the nation’s 16th largest bank, which is known for serving tech startups and the crypto industry – after the bank failed to raise emergency capital and experienced a run on deposits amid concerns surrounding its solvency. The collapse of SVB is the second biggest bank failure in history, behind Washington Mutual.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.