By law, banks can engage only in "the business of banking" and related or incidental activities. These limitations differentiate banks from other financial firms. The business of banking includes accepting customer deposits and making loans. But what else should be permitted? Over time, Congress and the federal bank regulators have permitted numerous and diverse activities that have broadened the scope of banking.
Policymakers are currently debating whether activities involving cryptocurrencies and digital assets (crypto) should be considered bank-permissible activities. Since 2017, there has been a repeated pattern of federal bank regulators, with changes in presidential Administrations, reversing policies put in place by predecessors to allow or disallow these activities.
Regulators use a two-prong test to decide whether to approve activities: (1) Are they related to the business of banking, and (2) do they pose safety and soundness risks to banks? There is disagreement on whether crypto meets either of those tests.
Congress could continue to defer to regulators on which crypto activities should be permissible, pass legislation to allow or ban particular activities, or combine both approaches. Legislation would result in a more durable outcome, reducing the likelihood of frequent regulatory changes. But regulators have specialized expertise that might make them better placed to evaluate whether particular activities are unduly risky for banks and are sufficiently related to the business of banking. In the 119th Congress, the House and Senate have considered legislation that would expand the permissible crypto activities of banks differently.
Following the stock market crash and banking crisis of the Great Depression, the Glass-Steagall Act (48 Stat. 162), among other things, separated banking and securities, with the goal of reducing the risk that banks would fail through speculative investments. To achieve this separation, the act restricted banks to banking activities. (Conversely, certain activities, such as deposit taking, can be undertaken only by insured depository institutions, such as banks.) Over time, statutory changes, such as those in the Gramm-Leach-Bliley Act (GLBA; P.L. 106-102) in 1999, and regulatory actions expanding permissible activities have eroded that separation. Ironically, this erosion was also motivated, in part, by concerns about failure—arguments were made that banks would become obsolete and uncompetitive with nonbank financial firms if their activities were too limited.
By statute, banks (12 U.S.C. §24 and 12 U.S.C. §1831a(a)) and bank holding companies (BHCs; 12 U.S.C. §1843(c)) are allowed to engage only in activities that are related to or "incidental to" the "business of banking," but Congress did not define those terms. Leaving those terms undefined provided regulators discretion to identify specific activities as permissible, but Congress has also identified some activities as permissible explicitly in statute. These activities vary somewhat by type of banking organization. For example, national commercial banks have the authority to transact in debt, bullion, cash, and stocks (on behalf of customers).
The financial subsidiaries of banks and the nonbank subsidiaries of financial holding companies (FHCs) are permitted to engage in more activities than bank subsidiaries (which house insured deposits)—those that are financial in nature, incidental to a financial activity, or complementary to a financial activity. GLBA created FHCs as a type of BHC approved to engage in a broader set of activities (including a few not permitted to financial subsidiaries). GLBA effectively made it possible for FHCs to own banking, securities, and insurance subsidiaries within a single corporate structure.
Congress has also statutorily grandfathered activities that were previously approved by regulators. For example, GLBA made all activities that the Federal Reserve had allowed by order before 1999 permissible for BHCs and FHCs.
A greater number of activities have been approved by regulators than expressly by statute. Each regulator approves permissible activities for banks under its jurisdiction following principles laid out in regulation and case law. When a novel activity arises, a bank may approach its regulator to seek approval. If granted, the activity might then be approved for all banks. The bank regulators have approved similar, but not identical, activities for different types of banks. The Comptroller of the Currency approves permissible activities for national banks. State-chartered commercial banks are generally also allowed to engage in those activities, and some states also allow them to engage in additional activities, subject to Federal Deposit Insurance Corporation approval.
The types of activities allowed by regulators are extensive and varied. Some are codified in regulation. For national banks, they include acting as an insurance agent, providing tax preparation services, participating in a payment system, and transacting in derivatives for limited purposes. In addition, the Comptroller regularly issues guidance and interpretive letters that have effectively made additional activities permissible.
In recent years, the policy debate on permissible activities has focused on crypto. Bank regulators have consistently maintained that banks can conduct crypto-related activities only if they are legally permissible and conducted in a safe and sound manner. However, how regulators have applied those principles has varied across leadership. Since 2017, as leadership has changed under different presidential Administrations, the bank regulators have issued guidance allowing, then prohibiting, then again allowing banks to engage in various crypto activities without prior case-by-case agency approval. The GENIUS Act (P.L. 119-27) made stablecoin issuance, custody, and related activities permissible for subsidiaries of banks.
Allowing banks to engage in activities less closely related to lending and deposit taking has costs and benefits. (Some of these benefits can be captured and costs contained by permitting activities within the FHC but outside of its banking subsidiaries.) The benefits of defining permissible activities expansively could include improved bank profitability and consumer welfare. This may result in increased customer convenience, cross-industry efficiency gains, profitable new business opportunities, and greater economies of scope and scale. Weighed against these benefits is the potential for nonbank activities to increase risks to bank safety and soundness and financial stability. However, although some of these activities may be more risky, greater diversification also reduces risk, so the net effect on safety and soundness is unclear. Because risks to safety and soundness could ultimately be borne by the taxpayer through the federal backstop (such as federal deposit insurance and the discount window), policy attempts to avoid taxpayer bailouts by limiting bank risk-taking. The presence of the federal backstop creates moral hazard—risks are not fully borne by banks or their creditors, encouraging excessive risk-taking in the absence of regulation.
The extensive list of permissible activities—coupled with market trends such as the growth in nonbank financial intermediation—raises broader questions about whether the legal distinction (and disparate regulatory treatment) between banks and nonbanks is still a useful one. Any future expansion of permissible activities could further blur the distinction.
Congress has debated (1) whether it is appropriate for banks to engage in crypto activities and (2) whether specific crypto activities should be approved (as was the case with stablecoin activities in the GENIUS Act) or prohibited through legislation or at the discretion of regulators.
Policymakers can evaluate crypto-related activities using the standard criteria of whether they are related to the business of banking and whether they threaten the safety and soundness of banks. In consideration of these arguments, note that there are a broad array of potential crypto-related activities, and those activities vary in how much risk they pose to banks and how similar they are to the bread-and-butter services that banks offer. One policy framework is for regulation to be technology neutral—meaning the technology used to deliver a service is not a factor in deciding whether that service is approved. In this framework, specific crypto activities should be permissible when they are analogous to a permissible activity in a traditional market. For example, the GENIUS Act took this approach with tokenized deposits. However, bank regulators cannot influence risk in underlying crypto infrastructure or markets, which have features that have made some parts of bank regulation difficult to comply with heretofore. For example, pseudonymity poses challenges for effective anti-money-laundering compliance. Further, crypto markets are volatile and involve speculation on price movements, making them, to some observers, inherently too risky for banks, given moral hazard, taxpayer protection, and the systemic importance of the banking sector. Various crypto activities, such as making loans collateralized by crypto assets, would expose banks to losses if prices fell. In isolation, crypto may not pose systemic risk, but bank exposure to crypto markets could increase systemic risk.
Congress may consider whether the regulatory shifts on crypto policy by bank regulators across Administrations have been detrimental to the banking and crypto industries, and whether a more permanent solution (allowing or restricting crypto activities) would be preferable. On the other hand, regulation is more flexible than a statutory approach, and allowing regulation to adapt can be advantageous, given markets are dynamic and crypto markets are still maturing. Congress arguably lacks the specialized knowledge of bank regulators. If concerns are mainly over whether crypto activities endanger banks' safety and soundness, regulators—with their supervisory expertise and access to confidential information—are arguably better placed than Congress to make that judgment.
An argument in favor of making crypto-related activities permissible is that doing so would be consistent with the expansive range of activities that have previously been found to be permissible. Nevertheless, Congress has always placed some limits on permissible activities, explicitly prohibiting some activities overall (such as proprietary trading) or within bank subsidiaries specifically. Another option would be to add to statute as permissible only those crypto activities that regulators had approved at some point in time.
In the 119th Congress, the CLARITY Act (H.R. 3633) would create an overarching regulatory framework for crypto. (For an overview, see CRS Insight IN12583, Crypto Legislation: An Overview of H.R. 3633, the CLARITY Act, by Paul Tierno.)
The House-passed version of H.R. 3633 would allow banks to use a digital asset or blockchain to engage in any activity that is otherwise permitted by law. It would also add certain activities involving crypto to the list of permissible activities for FHCs, meaning those activities would not be permissible for bank subsidiaries but would be for nonbank subsidiaries.
The Senate-reported version of H.R. 3633 would add 11 categories of crypto activities that would be permissible for all types of banking organizations and credit unions to engage in. The bill does not differentiate between activities that can be conducted in the insured bank subsidiary (which must be related to the "business of banking") and the nonbank subsidiary (which can also include activities that are "financial in nature"). Some of these activities go beyond what banks are allowed to do in analogous traditional financial markets. For example, banks can currently underwrite and deal in only limited types of securities such as those issued by federal and state governments or agencies, whereas the Senate-reported H.R. 3633 would allow banks to underwrite and deal in any digital assets.