Regulators Warn About Banking Crypto FinTech Companies
Banks are told to think twice, and then a third time, before considering fintech companies participating in the digital asset class.
However, the warning is not about cryptocurrency directly, but is instead aimed at banks that provide services to cryptocurrency companies.
Banks are warned if they are going to bank cryptocurrency Fintech customers, the bank must have a deep understanding of these customers. In addition, the bank must also monitor and have very solid knowledge of the industry as a whole. Banks that have the necessary controls to manage their activities in a safe and sound manner are reminded that “banking organizations are neither prohibited nor discouraged from providing banking services to customers of any specific class or type, as permitted by law or regulation.”
The likely result of such guidance will be increasing difficulty for certain crypto-focused companies to secure banking relationships.
The three major banking regulators issued a joint statement on liquidity risk to banking organizations on 23 February. The Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) issued similar guidance this month on crypto-asset risk for banks.
In the latest release, regulators specifically refer to deposit accounts for customers of “crypto-asset-related entities” and stablecoin reserves. The warning notes that accounts of crypto companies with clients – such as exchanges – and stablecoin issuers can have volatile movements of funds, and the potential rapid movement of funds increases liquidity risk for the banks servicing the accounts.
Perhaps some mistrust of the regulators of the cryptocurrency industry is evidenced by the statement “uncertainty and resulting deposit volatility may be exacerbated by end-customer confusion related to inaccurate or misleading representations of deposit insurance by a crypto-asset-related entity.” The bad actors misleading customers about the applicability of FDIC insurance outside of the regulated banking industry had a negative impact on the entire industry.
The more active involvement of banking regulators in the cryptocurrency industry is likely to lead to disruptions for the current participating firms, and a transition in the structure of the industry.
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