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

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

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

“These releases have caused banks to reconsider 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 in which federal regulators pressured financial institutions to cut off financial services to certain licensed, legally operating industries, simply because certain regulators and policymakers displeased these industries.”

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

“Unfortunately, nearly four years after the improved training, bank regulators appear to be reverting to old practices,” the letter said. “Although the actions against the crypto-economy stem from different regulatory concerns – it appears that the desired outcome of banking regulators is similar to that of Operation Choke Point – de-banking the crypto industry in America.”

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

They compared 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 scam happened.

“Regulators should not penalize an entire industry; rather, banking regulators should work to provide updated guidance and proposed rules for public comment so that legitimate businesses can access banking services and so that banks that wish to engage in issuing or holding key crypto assets have clear rules to follow,” wrote the. . “To do so would be consistent with the federal banking regulator’s mandate to articulate what ‘safe and sound’ banking practices are.”

The letter declared that the current approach adopted by banking regulators is inconsistent with this mandate and will result in risk being squeezed out of the regulated system. The real concern expressed by the senators is that this overreach by bank regulators could eventually spread to other industries if left unchecked.

“Any industry can potentially be ‘distributed’ based on a given regulator’s ideological perspective,” they wrote. “Banks have a mission to protect safety and soundness, not pick winners and losers based on a regulator’s partisan or ideological whim.”

To help address these concerns, the senators laid out a list of questions for regulators to address, including a rationale for how the increased scrutiny of crypto-related firms helps protect customers, whether it is possible for banks to offer services to crypto firms on everything under the updated guidance, and whether the agencies plan to issue similar guidance for other industries.

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

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