Despite the decentralized nature of cryptocurrencies and other digital assets, Web3 businesses need banking partners.
But on Thursday (August 8), news broke that Pennsylvania-based Customers Bank, one of the only crypto-friendly U.S. banks, was served with a 13-page regulatory enforcement action by the Federal Reserve regarding its digital asset and dollar token activities, underscoring the need for financial institutions (FIs) to balance both innovation and compliance.
The landscape of crypto-friendly banks, particularly in the United States, shrank significantly last spring with the closure of lenders Silvergate Bank and Signature Bank. In the wake of these bank failures, Customers Bank has become a go-to partner for crypto businesses, partnering with hundreds of crypto businesses, including major exchanges and stablecoin issuers.
Customer Bank’s digital asset business represents 15% of its deposit base and, despite the enforcement actions, executives stressed that they remain committed to serving digital asset businesses.
But now, to do so, client banks must give the Fed 30 days’ written notice before engaging in new strategic initiatives, offering new products or services or developing new relationships related to the crypto industry.
The bank should also improve its risk management practices in relation to its digital asset strategy, including by strengthening its written risk management policies, procedures and standards, and ensuring that individuals with risk management responsibilities related to its digital asset strategy have adequate expertise, stature, independence and authority to carry out their duties.
The Fed’s enforcement action focused on “significant deficiencies” related to Customers Bank’s compliance with the Bank Secrecy Act/Anti-Money Laundering (BSA/AML) and Office of Foreign Assets Control (OFAC) requirements in its digital assets vertical.
Learn more: Crypto’s three priorities for 2024: interoperability, acceptance, regulation
Regulatory Compliance is the Talking Point in the Cryptocurrency Industry
As cryptocurrency businesses strive to gain legitimacy and operational efficiency, this enforcement action serves as a reminder to cryptocurrency businesses and their potential banking partners that there are significant barriers to establishing and maintaining banking partnerships.
While cryptocurrencies are designed to operate outside of the traditional banking system, the reality is that crypto businesses still rely heavily on banking partners for a variety of essential services. These partnerships help bridge the gap between the decentralized nature of cryptocurrencies and the structured world of traditional finance, allowing crypto businesses to operate more efficiently, securely, and in compliance with global regulations.
The Fed’s recent enforcement action has angered some in the Web3 industry.
Tyler Winklevoss, a cryptocurrency investor and executive and founder of the Gemini cryptocurrency exchange, took to X (formerly Twitter) on Thursday to express his thoughts on the Fed’s 13-page letter.
“Given that Customers Bank is one of the few remaining crypto-friendly banks in America today, this means that the Fed is now a direct gatekeeper between crypto companies and their ability to get a new bank account,” Winklevoss wrote in an article on X.
Today, the Fed confirmed that Operation Choke Point 2.0 is in full swing, provided valuable insight into how it works, and verified that Harris’ crypto “reset” is a scam. The Fed revealed all of this in a 13-page enforcement action it issued this morning against… pic.twitter.com/zhLRRWAH0E
— Tyler Winklevoss (@tyler) August 9, 2024
Learn more: The Benefits of Blockchain for Regulated Industries
One of the biggest hurdles to banking partnerships is the regulatory environment. Cryptocurrencies operate in a space that is still largely undefined by regulators in many parts of the world. This lack of clarity creates a cautious approach among banks, who are hesitant to engage with companies that could potentially violate anti-money laundering and KYC (Know Your Customer) regulations.
Cryptocurrency companies often flout these regulations. Last summer, troubled cryptocurrency exchange Binance used two U.S. banks to move billions of dollars around the world, according to the Securities and Exchange Commission (SEC), moving nearly $70 billion through accounts at Silvergate Bank and Signature Bank.
“This is one of the most significant cases of financial malfeasance I have ever seen – the documentation is overwhelming,” Louise Shelley, a professor at George Mason University who specializes in money laundering, was quoted as saying in a report.
Shelley added that she was “amazed” that banks moved billions of dollars offshore for Binance over such a long period of time.
Earlier this summer (July 25), U.S. cryptocurrency exchange Coinbase was fined $4.5 million by a U.K. regulator for serving “high-risk” customers. In April, U.S. Deputy Treasury Secretary Wally Adeyemo said cryptocurrencies were increasingly becoming a safe haven for “malicious actors” such as terrorist groups.
Beyond regulatory and reputational concerns, there are operational and technical challenges. Integrating cryptocurrency businesses into traditional banking systems requires significant effort and investment. Many banks do not have the infrastructure or expertise to handle digital assets, and the costs associated with upgrading systems or training staff can be prohibitive. Additionally, the fast-paced nature of the cryptocurrency industry often clashes with the more methodical and cautious approach of traditional banks, leading to mismatches in expectations and timelines.
But PYMNTS Intelligence found that using cryptocurrencies for cross-border payments could be the winning use case the industry has been looking for. The study found that blockchain-based cross-border solutions, particularly stablecoins, are increasingly being adopted by businesses looking for a better way to transact and expand internationally.
PYMNTS Intelligence also found that blockchain has many potential benefits for addressing the unique needs of regulated industries, including finance, healthcare, identity verification and supply chain management.
At the same time, other PYMNTS Intelligence data reveals that for smaller financial institutions and credit unions, embracing innovation is often the best path forward.
