FDIC and CFTC Ease Crypto Restrictions for Banks and Derivatives

The Federal Deposit Insurance Corporation (FDIC) announced in a letter on March 28 that institutions under its supervision, including banks, can now engage in crypto-related activities without prior approval. This announcement came alongside the Commodity Futures Trading Commission (CFTC) stating that digital asset derivatives will not be treated differently from other derivatives.

The FDIC letter rescinds a previous directive issued under former U.S. President Joe Biden’s administration, which required institutions to notify the agency before engaging in crypto-related activities. According to the FDIC’s definition:

“Crypto-related activities include, but are not limited to, acting as crypto-asset custodians; maintaining stablecoin reserves; issuing crypto and other digital assets; acting as market makers or exchange or redemption agents; participating in blockchain and distributed ledger-based settlement or payment systems, including performing node functions; and related activities such as finder activities and lending.”

FDIC-supervised institutions should consider the associated risks when engaging in crypto-related activities. These risks include market and liquidity risks, operational and cybersecurity risks, consumer protection requirements, and Anti-Money Laundering obligations.

CFTC: Digital Asset Derivatives Will Not Be Treated Differently

The U.S. crypto derivatives market had been operating in a gray area due to regulatory uncertainty, but that is changing. On March 28, the CFTC withdrew a staff advisory letter to ensure that digital asset derivatives—a type of trading product—will not be treated differently from other derivatives. This change is “effective immediately.”

This shift in approach from the CFTC and FDIC reflects a new environment under U.S. President Donald Trump’s administration. Trump had vowed to make the U.S. “the crypto capital of the planet.”

Crypto companies are adjusting their strategies to align with the easing regulatory climate. On March 10, Coinbase announced the offer of 24/7 Bitcoin and Ether futures. In addition, the company is reportedly planning to acquire the crypto derivatives exchange Derebit.

Another U.S.-based crypto exchange, Kraken, has also made moves in the derivatives market. On March 20, it announced plans to acquire NinjaTrader, which would allow it to offer crypto futures and derivatives in the United States.

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Risks Between the Crypto Sector and Banking Systems

The cryptocurrency industry faced the threat of being excluded from traditional banking systems under Operation Chokepoint 2.0. Jason Lau, Chief Innovation Officer at the crypto exchange and self-custody wallet provider OKX, emphasized that building strong relationships with banks and financial stakeholders serves as a strategic safeguard against debanking threats.

Lau highlighted that the traditional financial world is heavily based on trust and that building relationships with banking institutions, financial regulators, and other stakeholders is essential to maintaining strong partnerships. In an interview with Cointelegraph, Lau stated:
“You need to take the time to build relationships with all your stakeholders, including regulators and your banking partners. We’ve spent years and years working with our partners and stakeholders to make sure they understand our business.”

The Global Problem of Debanking

Many Operation Chokepoint 2.0 debanking cases originated in the United States and involved US-based entities. However, debanking continues to be a global issue with implications for business, technological innovation, and freedom of speech.

For instance, Ben Rose, the former regional manager of Binance Australia, claimed that the exchange was given only 12 hours’ notice before being debanked. The debanking, which occurred in the middle of the night, reportedly came without a clear explanation.

Debanking Cases in the United Kingdom

In July 2023, leaked documents revealed that UK politician Nigel Farage was debanked due to his political views. This led the UK government to propose revoking banks’ licenses if they violate freedom of speech.

The UK government laid out the following consumer protection provisions for banks:

• A three-month notice to customers before account closures,
• An explicit reason for account closure,
• An opportunity to appeal the closure.

In 2023, crypto companies in the UK also reported being turned away by banks. Common issues included excessive paperwork, frozen accounts, and rejected applications without sufficient explanation.

As of 2024, crypto firms and projects continue to face similar challenges.

Debanking gained widespread recognition in online platforms and digital culture, earning a spot on the 2023 Collins Dictionary’s Word of the Year shortlist.

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Coinbase Head of Legal: “The Public Has a Right to Transparency”

Coinbase Head of Legal Paul Grewal said in a social media post on Nov. 1 that it has found more than 20 instances of the FDIC advising banks to “suspend,” “avoid,” or “discontinue” crypto banking services. Grewal called the FDIC’s covert approach a “shameful example” of a government agency attempting to cut off financial access to lawful American businesses.

FDIC Questions Banks’ Risk Assessments

The 23 documents outlined in the court filing include the FDIC’s instructions to banks not to offer crypto services. The documents, which show instances where the FDIC questioned banks’ risk assessments of crypto services, state that the FDIC advised banks not to offer crypto services until an investigation was completed.

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For example, “Document 5” states that the FDIC met with a bank to conduct a detailed review of crypto services. The bank submitted additional documentation after the meeting, but the FDIC allegedly raised more “questions” and stated that “the service should not be extended to new customers until the investigation is completed.”

These developments come on the heels of Coinbase’s announcement that it is ready to cooperate with whatever administration comes into power in the U.S. elections.

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Investigation and Congressional Testimony

This announcement follows a report by a third party published on May 7 that revealed a lot of cases of sexual harassment, among other behavioral misconduct, at the FDIC. The investigation also focused on how the management treated these occurrences. On May 15, Gruenberg was summoned to Congress and was at the receiving end of bipartisan attacks from the lawmakers who were angry with the revelations. Senate Banking Chair Sherrod Brown has demanded that President Biden remove Gruenberg, thus mirroring the overwhelming disappointment storming out from both Republicans and Democrats.

Reactions and Future Implications

Notwithstanding the criticism, Senator Elizabeth Warren commended Gruenberg for having the capacity for change implementation at the FDIC. Nevertheless, the White House has made it clear that it would like to appoint a new nominee for the role. Those who are involved in the crypto community and have been accusing Gruenberg of his involvement in “Operation Choke Point 2.0″  have lauded the decision of Gruenberg to resign. Nic Carter had declared it “the best day ever,” and digital asset industry lawyer John Deaton slammed Senator Warren for supporting Gruenberg with the expression, “It is shameful how Elizabeth Warren circled the wagons to keep one of her disgraced puppets in place. I can’t wait for the debates.”

While addressing a gathering, Gruenberg played a significant role in directing FDIC’s policies that have a bearing on the crypto industry, stating that investors’ must be cautious with crypto assets, terming them as risky financial innovations that led to the 2008 financial crisis.

Looking Ahead

In the wake of the succession at the FDIC, attention is expected to, given the findings of the investigation, be turned to the internal problems and rebuilding confidence in the institution. The exit of Gruenberg is of particular importance for the agency, bringing potential repercussions for traditional banking and the rapidly increasing digital asset space.

The post FDIC Chairman Martin Gruenberg to Step Down Amid Workplace Culture Scandal appeared first on Coin Engineer.

During an event hosted by the Mercatus Center focusing on tokenization, Hill, who was nominated as a Republican to the FDIC in 2022, highlighted the discrepancy, noting, “This treatment sharply departs from how custodians account for all other assets held in custody, which are generally held off balance sheet and treated as the property of the customer, not the custodian.”

The bulletin has faced significant criticism within the crypto industry, with concerns raised that it may impede banks from offering custody services for digital assets. Lawmakers recently initiated a resolution to rescind the bulletin following a Congressional watchdog’s assertion that the SEC required congressional approval before implementing SAB 121.

Additionally, Hill addressed the impact of SAB 121 on spot bitcoin exchange-traded funds (ETFs) approved by the SEC earlier in the year. Notably, lawmakers had indicated that banks could not serve as custodians for these ETFs due to the bulletin’s provisions.

Hill questioned the fairness of the situation, stating, “It is worth asking whether it is in the public interest for one crypto exchange to provide custody services for most of the market in approved bitcoin exchange traded products, while highly regulated banks are effectively excluded from the market.”

Furthermore, Hill criticized the SEC‘s broad definition of crypto, which encompasses “tokenized versions of real-world assets.” He emphasized the importance of seeking public feedback before implementing significant policy changes, suggesting that clarification regarding SAB 121’s applicability to a broader range of tokenized assets beyond blockchain-native assets would be beneficial.

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