Congressmen raise concerns over prudential regulators’ effort to ‘de-bank’ crypto industry

U.S. Congressmen French Hill, Patrick McHenry and Bill Huizenga sent the Federal Deposit and Insurance Commission (FDIC) a joint letter on April 25 requesting information about regulatory efforts to deny banking services to the crypto industry.

The Republican lawmakers have set a May 9 deadline for the regulator to provide all requested information.

‘Disfavored industries’

The lawmakers said in the letter addressed to FDIC chairman Martin J. Gruenberg that regulators have previously pressured financial institutions under their supervisory purview to cease providing banking services for “politically disfavored industries”  under the Obama administration.

Federal prudential regulators including the FDIC, the OCC and the Federal Reserve targeted companies in these industries — like gambling and tobacco — on the basis of “reputational risk” that was defined arbitrarily.

Banks would stop providing services to companies based on direct guidance from the watchdogs and did not have to explain themselves.

The letter continued that this improper practice continued until Congress intervened and created a rule to stop this from happening. However, the rule was abolished quickly after the Biden administration took office.

Crypto industry is the new black sheep

The lawmakers said that regulators are once again pressuring banks to not provide services to an industry — with crypto being the latest target. They wrote:

“Today, we are seeing the resurgence of coordinated action by the federal prudential regulators to suppress innovation in the United States. There is no clearer example than in the digital asset ecosystem.”

According to the letter, the OCC issued guidance in November 2021 that any bank providing “services related to digital assets” must provide evidence in writing to regulators that it was doing so in a “safe and sound manner.” The watchdog would then provide a “written non-objection” to the bank which would allow it to engage with digital assets.

Additionally, the FDIC issued similar guidance in April 2022 which stated that crypto-related activities pose “significant safety and soundness risks” and could impact financial stability.

Furthermore, the FDIC, the OCC and the Federal Reserve issued a joint statement in January 2023 that directed banks to avoid providing services to “crypto-asset sector participants.”

The lawmakers said:

“Given the actions by the federal prudential regulators, it is not hard to imagine why a bank would be hesitant to offer banking products and services to digital asset firms.”

Digital assets are not risky

The congressmen said that “digital asset activity is not inherently risky” and should not be treated as such.

According to the letter, regulators have used recent scandals related to the crypto industry — like the collapse of crypto exchange FTX and Silicon Valley Bank — to further their agenda.

However, lawmakers argued that FTX did not fall because digital asset activity was risky but because of “run-of-the-mill fraud.” Similarly, crypto-related customers were not the cause behind the collapse of Silicon Valley Bank and Signature Bank.

The letter said that the prudential regulators’ reaction to these scandals should be to focus on fraud and mismanagement and not “de-risking of the digital asset industry.”

The lawmakers said that the actions these regulators have taken in recent months point to a “coordinated strategy to de-bank the digital assets ecosystem in the United States.”