The Shortsightedness of Run-Amok Regulators

Are regulators trying to kill crypto by banning banks from doing business with crypto companies? It sure looks like that.

And if they are, the country’s federal and state regulators are doing a great disservice to investors, stifling American innovation and causing long-term damage to the American economy. Anyone who thinks this is pure conspiracy theory should take a closer look at what regulators have been doing lately. In January, the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) issued a joint statement discouraging banks from accepting deposits from crypto companies – taking action without the statutory public input.

As banks continued to do business with crypto companies, regulators made their point by shutting down Silvergate Bank, Signature Bank and Silicon Valley Bank (SVB). And in case the message wasn’t clear, when the FDIC transferred Signature Bank’s $38.4 billion in deposits to Flagstar Bank, Signature’s $4 billion in deposits held in its digital asset businesses were excluded.

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Companies involved in digital assets are engaged in legal activities. Can someone explain to me why the FDIC would prohibit Flagstar Bank from accepting the payroll account of a company operating legally?

Former Congressman Barney Frank, a driving force behind the Dodd-Frank Act, served on Signature’s board and has publicly complained that regulators shut down Signature because it profited crypto companies. “Regulators wanted to send a very strong anti-crypto message. We became the poster boy because there was no insolvency based on the bank’s fundamentals,” he told CNBC.

A company that cannot open a bank account cannot be in business. But regulators are foolish to think they can kill crypto by preventing crypto companies from operating. Regardless of what US regulators do, these companies will actually operate – simply by moving their operations to other countries.

That’s what bitcoin miners did after China banned crypto. Instead of crushing mining, China had the sole effect of chasing the miners elsewhere—mostly to the United States, where a dozen states have welcomed them. Crypto creates high-paying, skilled jobs, and that’s exactly what forward-thinking governors want. But if these companies are now unable to maintain bank accounts, they have no choice but to move again. Investors must follow them.

It would hurt American innovation, our economy and American investors. Prohibition didn’t stop people from drinking alcohol a century ago; it just forced them into speakeasies where they were overcharged for liquor that all too often made them sick. Over-regulation of crypto will have the same impact: Trying to take away the freedom of choice among American customers will simply drive them to what Rep. Tom Emmer (R-Minn.), the third-highest-ranking member of the Republican majority in the U.S. House of representatives, warn of “offshore, unregulated, opaque and uncertain markets.”

In fact, banks around the world are licking their chops at the prospect of winning big new bank accounts from crypto companies seeking a home. Digital Currency Group (the parent company of CoinDesk) says that many banks abroad are still happy to do business with crypto companies.

Think back to when President George W. Bush banned stem cell research in the United States. It didn’t kill science, it just pushed American scientists to other countries, including South Korea and Israel. Science has flourished, but we lost our leadership in innovation in that sector.

So if I can speak to US regulators on behalf of the crypto community (no one has asked me to), I’ll channel Clint Eastwood’s Dirty Harry character and say, “Go ahead, make my day.” When regulators start closing banks because they don’t like what the banks are doing – even if what the banks are doing is perfectly legal – all they do is scare all bank customers everywhere that the banks are not safe. Do regulators really think it’s a smart idea?

The most ironic element in this whole situation is that the message regulators are sending is that regional banks are not safe. Move your money to the national banks that are too big to fail. Well, since 2000, the nation’s top 25 banks have paid a combined $350 billion in fines—for violations including mortgage abuse, toxic securities abuse, investor protection violations, banking violations, consumer protection violations, and anti-money laundering deficiencies.

The regulators cannot shut down all these banks because there would be no more American banking system. There are $20 trillion in deposits in US banks, and half of that money is held by the top 25 banks. So the regulators have shut down regional banks like Silvergate, SVB and Signature, chasing people into the big banks – the very place depositors are most likely to be ripped off by abusive sales practices, high fees, poor disclosures and lousy service.

The shortsightedness of our nation’s banking regulators is astonishing. No wonder so many bank customers and investors have bought bitcoin (BTC) since Silvergate shut down. BTC is up 70% this year, while the S&P 500 is close to flat. Bank depositors now realize they can wake up to find their accounts gone, without warning. That won’t happen with a bitcoin decentralized finance (DeFi) wallet. With a bank, you have to wait for the branch to open – if it opens – on Monday. With crypto, your money is available to you 24/7.

Have the Fed, FDIC and OCC actually made bitcoin safer than banks? It’s hard to say with a straight face, but admit it: You’re actually debating that question in your head. It’s shocking that the question has come up at all.