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Welcome Back Note; US Federal Bank Regulators Warn Of Crypto Custody Risks; Speaker of the House

Welcome Back

2023 has arrived with a sense of opportunity in Washington as a new Congress (attempts to) get going.

Last year, DeFi faced many challenges in Washington. The collapse of numerous centralized businesses in crypto underscored the need for and value of decentralized finance protocols.

Unfortunately, those collapses have fueled fear and misunderstanding of crypto and DeFi, and we’ve got our work cut out for us this year.

We will continue to demonstrate to policymakers why DeFi can serve as a solution to these problems, not only in crypto but also across all economic activities, and we will continue to fight for the more inclusive and prosperous future that DeFi can help realize.

Happy new year and thanks for reading.

US Federal Bank Regulators Warn Of Crypto Custody Risks

What happened?

On Tuesday, U.S. federal banking regulators (Federal Reserve, FDIC, and OCC) rang in the New Year by issuing a joint statement warning banking institutions of the risks associated with cryptocurrencies and servicing crypto-related firms and businesses.

The agencies characterized their current approach to reviewing banks’ proposals to engage with the market as highly cautious, explaining that “it is important that risks related to the crypto-asset sector that cannot be mitigated or controlled do not migrate to the banking system.”

While the statement did include boilerplate language that banks “are neither prohibited nor discouraged from providing services to customers of any specific type,” the agencies warned that a bank directly dealing with digital assets “is highly likely to be inconsistent with safe and sound banking practices.”

The agencies then went even further, explaining that they “have significant safety and soundness concerns with business models that are concentrated in crypto-asset-related activities or have concentrated exposures to the crypto-asset sector.”

What does this mean?

This statement is aggressive and the agencies should rescind it. It will unacceptably (further) restrict crypto-related businesses' ability to access traditional financial services.

The agencies’ comment on the purported safety and soundness risks caused “concentrated exposures to the crypto-asset sector,” probably a reference to Silvergate, is particularly insulting given that the agencies themselves created this “concentration” to begin with.

Banking regulators’ long-running and explicit hostility toward crypto and crypto businesses created an environment in which the vast majority of US banks are unwilling to touch crypto or crypto businesses with a ten-foot pole.

Consequently, crypto-businesses must flock to those few banks that are willing to serve crypto-businesses, notwithstanding US banking regulators’ qualms. Now, those same regulators “have significant safety and soundness concerns” with the business models of the few banks willing to offer financial services to lawful US crypto companies. There’s no winning, which we hope isn’t the point.

In the United States, offering banking services requires regulatory approval, which is important in this context in two ways.

First, market forces cannot fill “gaps in the financial services market” (i.e., you couldn’t just set up a bank this afternoon and serve crypto businesses). Since our financial system is effectively a government-sponsored walled-garden, the government must ensure all legal businesses and law-abiding citizens enjoy fair access to that government-sponsored walled-garden.

Second, regulators’ public statements are extraordinarily influential. Sure, the agencies advise that banks are not “discouraged from providing services to customers of any specific type,” but is that really the message the statement sends? If you were a banker with thousands of clients in a range of industries and your regulator sent you this statement, would your takeaway be to take a closer look at potential crypto clients or to shun them altogether? How much would taking a closer look cost?

The agencies should rescind this statement, which facially reads as an attempt to constrict lawful US businesses’ access to financial services. If they don’t, Congress should consider intervening.

Speaker of the House

What happened?

The US House of Representatives has had three days of voting to select a Speaker of the House. Before they do so, the representatives-elect cannot even be sworn in.

Representative Kevin McCarthy (R-CA) is the front runner for the Republican party, which has a thin majority in the House, but a small group of Republicans remain opposed to him being elected Speaker.

What does this mean?

How the speaker race shakes out could have implications for crypto in this Congress. For example, we don’t know who will lead certain key congressional committees, and who ends up being speaker could influence those outcomes significantly. Now we wait…


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