FDIC pause letters urged banks to halt crypto services citing potential risks.
Coinbase disclosed FDIC's caution to banks on crypto partnerships and custody.
FDIC scrutiny on crypto banking draws parallels to Operation Chokepoint tactics.
Coinbase documents reveal Federal Deposit Insurance Corporation (FDIC) letters advising banks to cease certain cryptocurrency services from 2022 to 2023, until the FDIC gained a better understanding of the risks. Labeled as "pause letters," the communications directed banks to halt activities such as Bitcoin transactions through third-party partnerships and advanced crypto services.
According to Coinbase Chief Legal Officer Paul Grewal, these letters demonstrate a coordinated effort to restrict crypto initiatives. The FDIC found two additional letters during a follow-up search, prompting calls for further congressional inquiry. These letters also explicitly targeted banks’ boards of directors, a rare practice, raising concerns about their potential impact on banking institutions' willingness to engage with the cryptocurrency sector.
Cryptocurrency Exchanges and Startups’ Banking Issues
Crypto companies in the United States have faced increasing hurdles in accessing banking services, a critical requirement for operations. The FDIC's actions have drawn comparisons to "Operation Chokepoint," a previous regulatory program that pressured financial institutions to cut ties with certain industries.
Industry leaders like Ripple's Chief Legal Officer Stuart Alderoty highlighted the FDIC’s approach as a chilling tactic aimed at discouraging banks from supporting cryptocurrency businesses.
The internal FDIC memorandum from 2022 underscores a distinction between banks engaging directly in crypto activities, such as holding digital assets, and offering traditional banking services to crypto firms, such as lending or providing deposit accounts. The memorandum clarified that direct engagement requires stricter scrutiny due to associated risks.
However, FDIC Chairman Martin Gruenberg maintained that the agency has not barred banks from working with crypto firms but emphasized the supervisory attention given to crypto-related activities.
Legal and Industry Responses to FDIC Actions
Coinbase’s legal campaign aims to uncover more information regarding FDIC practices, including allegations of a 15% deposit cap on crypto-friendly banks. The exchange also claims that the agency’s directives distort free market and overstep its authority. Brian Armstrong, chief of Coinbase, anticipated the judicial system could intervene by pointing out that regulatory agencies ought not to set policies but uphold the laws.
Attorney John Deaton has also voiced concerns, proposing a federal investigation into what he perceives as a challenge to free-market capitalism. Deaton and other industry representatives emphasize the need for transparency and fair regulatory practices to foster innovation and equal opportunities within the cryptocurrency sector.
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