Crypto and Banking: Policy Issues
February 6, 2023
Crypto and Banking: Policy Issues
Some banks have expressed interest in offering services
Risk is not the only reason a bank might not be allowed to
related to cryptocurrencies and other digital assets. Yet
engage in an activity under current law. A central tenet of
extreme and persistent price volatility—along with several
bank regulation is that banks should engage only in
high-profile scandals, scams, thefts, and failures—have
activities that are part of or incidental to the business of
generated debate on the risks crypto could pose for banks
banking. Some such activities are explicitly laid out in
and their customers if not properly managed.
statute, while others have been interpreted to be related by
the bank regulators. Bank regulators or Congress could
Banks could gain exposure to crypto by providing some
choose to allow (or prohibit) some or all activities related to
types of cryptocurrency services. Alternatively,
cryptocurrency on the basis that they are (or are not) closely
cryptocurrency firms may seek bank charters, forming
related to the business of banking.
banking organizations with crypto operations. While
regulators at the state and federal levels have already begun
Although bank regulators can manage the risks a bank
to allow certain crypto firms to obtain limited purpose
takes, they cannot directly address risks in underlying
banking charters (see CRS In Focus IF11997, Bank
crypto markets. Fed Vice Chair Brainard argued, “It is
Custody, Trust Banks, and Cryptocurrency), this In Focus
important for banks to engage with beneficial innovation
analyzes the extent to which banking regulators—the
and upgrade capabilities in digital finance, but until there is
Federal Reserve (Fed), Office of the Comptroller of the
a strong regulatory framework for crypto finance, bank
Currency (OCC), and Federal Deposit Insurance
involvement might further entrench a riskier and less
Corporation (FDIC)—are considering the role traditional
compliant ecosystem.” Further bank entry into crypto might
banks should have in crypto markets. To date, Congress has
increase risk. For example, banks can be a source of
deferred to regulators to set crypto policy for banks but may
systemic risk to financial stability. High-risk crypto
consider future legislation due to policy differences or
activities might pose minimal systemic risk outside the
because regulators have not created an overarching
banking system (even if they pose other risks) but could
framework, instead employing an ad hoc approach
pose systemic risk if bank involvement threatened the
generally outside the administrative rulemaking process.
stability of the banking system.
Bank Regulation and Crypto
Until now, this In Focus has considered options to limit
Crypto poses many of the risks for which banks are closely
bank involvement in crypto in order to reduce risk to banks
regulated, including safety and soundness, consumer
(and by extension the financial system). Another strategy is
protection, and anti-money laundering. Because banks are
to bring aspects of crypto into the banking regulatory
protected by a federal safety net, safety and soundness risks
umbrella to reduce the risk of crypto and provide legitimacy
to banks are ultimately borne by taxpayers. Regulators or
to the industry. Some policymakers have proposed limiting
Congress can choose whether to manage these risks by
certain crypto activities only to banks. For example, a 2021
prohibiting activities that are not consistent with these
report issued by the Treasury and regulators called for
requirements or by imposing regulatory requirements to
prudential regulation of payment stablecoins to address
mitigate them.
systemic risk (on the grounds that stablecoins are prone to
destabilizing run risk). Specifically, the report called for
Regulators or Congress could set regulatory requirements
legislation allowing only insured depositories to issue
around crypto that make it attractive or unattractive for
payment stablecoins. Today, stablecoins available to
bank participation. When an activity is highly risky,
consumers are generally issued by nonbanks. Other
regulators can allow it but set the regulatory cost
proposals call for banks to issue payment stablecoins in
unattractively high. Alternatively, sometimes regulators or
competition with nonbank issuers. Under existing authority,
Congress decide that the risk-benefit trade-off of an activity
bank regulators may be able to allow banks to issue
is not favorable and impose blanket bans on bank
payment stablecoins but could not prevent nonbanks from
participation in certain activities or asset classes—an option
issuing them. (See CRS Legal Sidebar LSB10754,
for addressing crypto. A downside to a blanket ban is that
Stablecoins: Legal Issues and Regulatory Options (Part 2).)
different types of crypto-related activities pose different
levels of risk. Instead of regulating crypto uniformly, Fed
One strategy would be for regulators to take no significant
Vice Chair Barr has called for ensuring that “crypto activity
action in the short run. This could discourage banks from
inside banks is well regulated, based on the principle of
taking risks that might result in disciplinary action while
same risk, same activity, same regulation, regardless of the
regulators evaluate and formalize potential rules. It is also
technology used for the activity.”
possible that regulators could slow-walk regulation and
guidance in an attempt to avoid clashes with industry while
at the same time allowing banks to develop their own
https://crsreports.congress.gov
Crypto and Banking: Policy Issues
blockchain-based technologies (like those underlying
experienced a sharp decline in deposits and share price.
crypto) to compete with the crypto sector. Regulators used a
Signature Bank also experienced a sharp decline in deposits
wait-and-see approach during the advent of mobile
and share price after concerns about its crypto exposure.
payments, which ultimately became largely a bank product,
limiting the need for new regulation.
Banks may also use the technology that facilitates crypto to
carry out functions currently performed by traditional
Bank Holding Companies (BHCs)
technologies. For example, JPMorgan Chase (JPM) has
Instead of engaging in crypto activities through a bank
begun experimenting with various blockchain applications.
subsidiary, a parent BHC might choose to place crypto-
Unlike the blockchains employed by cryptocurrencies such
related activities in a nonbank subsidiary legally separate
as Bitcoin, those used by JPM are accessible only to
from any bank subsidiaries. BHCs are subject to a different
approved users, usually JPM employees. This controlled
set of rules than banks are. Generally, BHCs may own
use of the technology that supports cryptocurrencies may
nonbank subsidiaries so long as the business of those
introduce operational risks, but it is fundamentally different
subsidiaries is “financial in nature.” As the regulator of
from industry exposure to crypto markets.
BHCs, the Fed has limited authority over nonbank
subsidiaries, which is even more limited if the subsidiary
Bank Regulatory Policy Initiatives
had another primary regulator, such as the Securities and
Regulation of bank involvement in crypto is still evolving.
Exchange Commission. Under “source of strength”
Currently, regulators have not created a transparent and
requirements, the Fed would have authority to require that
overarching framework for bank participation in crypto.
the subsidiary not place the safety and soundness of the
Instead, regulators are making decisions on a case-by-case
bank subsidiaries or holding company at risk. Thus, for a
basis through the supervisory process. In the past decade or
BHC to operate a crypto subsidiary, it would need to meet
so, federal bank regulators have developed guidance and
the “financial in nature” and “source of strength” tests.
policy to provide clarity to the banking system on
permissible crypto activities. However, as leadership has
Current Bank Involvement in Crypto
changed and crypto markets have risen and fallen, some
There are multiple types of activities a bank could
agencies have changed their positions on the risk-benefit
potentially undertake involving crypto. In 2021, the Fed,
trade-off of crypto, such that it may not be entirely clear
OCC, and FDIC identified areas where banks might engage
what banks might expect from regulators long term. For
in crypto-related activities, such as issuing payment
example, in 2020 and 2021, then-acting OCC head Brian
stablecoins (discussed below), providing custody services,
Brooks issued a series of interpretive letters to provide
facilitating crypto transactions for customers, making loans
guidance and clarify that national banks and federal savings
using crypto as collateral, and holding crypto on their own
associations were authorized to provide custody services for
balance sheets. This section highlights examples of crypto
cryptocurrency assets, hold certain stablecoin reserves, and
services offered by traditional banks, but it is not
use stablecoins to engage in and facilitate payment
exhaustive.
activities. But then, current OCC acting head Michael Hsu
issued an interpretive letter to clarify that banks must notify
Custody services is generally defined as settlement,
and obtain permission from their supervisory offices before
safekeeping, and reporting of customers’ marketable
they engage in these activities. Similarly, in 2022, the Fed
securities. Commercial banks offer these types of services
and FDIC separately released supervisory letters informing
in addition to their core banking activities, while trust or
banks under their jurisdictions that they must notify their
custodian banks focus primarily on custody and fiduciary
regulators before engaging in crypto-related activities.
activities. Bank of New York Mellon (BNYM), for
example, one of the largest custodian banks, provides
Most recently, the federal banking regulators issued a joint
primary custodial services of reserves for the USD Coin
statement clarifying that banks are “neither prohibited nor
(USDC), a stablecoin issued by Circle. In addition, BNYM
discouraged from providing banking services” to legal
permits certain clients to hold and transfer Bitcoin and
crypto firms. However, the statement also emphasized the
Ether, and State Street Bank announced it may do so soon.
multiple risks posed by crypto and noted that banks
“issuing or holding as principal crypto-assets that are
Silvergate, a state-chartered bank regulated by the Fed,
issued, stored, or transferred on an open, public, and/or
specializes in crypto-related services. Silvergate offers the
decentralized network, or similar system is highly likely to
Silvergate Exchange Network (SEN), which allows its
be inconsistent with safe and sound banking practices.”
various crypto clients to send dollars and euros among
members “enabling near real-time transfers and immediate
One way that banks are regulated for safety and soundness
availability of funds.” The fiat reserves of crypto
is through capital requirements. Although U.S. regulators
platforms—presumably clients of SEN—made up 90% of
have not yet determined under what circumstances banks
the bank’s liabilities as of the end of the third quarter 2022.
could hold crypto assets on their balance sheets, the Basel
The bank also advertises loans collateralized by Bitcoin.
Committee on Bank Supervision (an international forum to
Silvergate, whose SEN network was used by entities owned
devise regulatory standards) is in the process of formulating
by FTX, the failed crypto exchange that lost more than $8
international capital standards for bank exposures to crypto.
billion, demonstrates how cryptocurrency could pose risks
Typically, U.S. bank regulators have implemented Basel
to a bank’s safety and soundness. In the wake of numerous
standards through the domestic rulemaking process.
crypto platform collapses and concerns of contagion in the
industry, Silvergate’s business model was challenged, and it
Marc Labonte, Specialist in Macroeconomic Policy
https://crsreports.congress.gov
Crypto and Banking: Policy Issues
Paul Tierno, Analyst in Financial Economics
Andrew P. Scott, Analyst in Financial Economics
IF12320
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https://crsreports.congress.gov | IF12320 · VERSION 1 · NEW