Regulators Warn Banks – Say No To Crypto FinTech Companies
Banks are being told to think twice, and then a third time, before dealing with fintech companies who participate in the digital asset class.
The warning is not about cryptocurrency directly, however, and instead is targeted towards banks who provide services to cryptocurrency companies.
Banks are being cautioned if they are going to bank cryptocurrency and fintech customers, the bank must have a deep understanding of those customers. In addition, the bank must also monitor and have very solid knowledge of the overall industry. Banks that do have the appropriate controls to manage the activities safely and soundly are reminded that “banking organizations are neither prohibited nor discouraged from providing banking services to customers of any specific class or type, as permitted by law or regulation.”
The likely result of such guidance will be increasing difficulty for certain crypto-focused companies to secure banking relationships.
The big three banking regulators issued the Joint Statement on Liquidity Risks to Banking Organizations on February 23. The Federal Reserve, Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) issued similar guidance month on crypto-asset risks to banks.
In the latest release the regulators specifically reference deposit accounts for customers of “crypto-asset related entities” and stablecoin reserves. The warning notes that accounts for crypto companies with customers – such as exchanges – and stablecoin issuers may have volatile movement of funds, and the potential rapid movement of funds increases the liquidity risk for the banks that service the accounts.
Perhaps some distrust by the regulators of the cryptocurrency industry is evidenced by the statement “uncertainty and resulting deposit volatility can be exacerbated by end customer confusion related to inaccurate or misleading representations of deposit insurance by a crypto-asset-related entity.” The bad actors who mislead customers about the applicability of FDIC insurance outside of the regulated banking industry had a negative impact to the entire industry.
The more active involvement of the banking regulators in the cryptocurrency industry will likely result in disruption for the current participant firms, and a transition in the structure of the industry.