From January 2023, the US government has taken several proactive steps to block crypto firms from accessing traditional banking services, in what appears to be the next strike against the largely unregulated industry.
Although cryptocurrency transactions take place without the need for traditional banks, these banks are a reliable bridge between crypto and fiat. Nevertheless, the US government continues its operations.
Why the US government has locked crypto firms out of traditional banking
After the FDIC posted a joint agency statement on risky crypto assets of traditional banking organizations, the National Economic Council issued a statement on January 27, 2023, urging banks to separate risky digital assets from the traditional banking system. Advised. The same day, the Federal Reserve Board announced that all banks under its supervision would be subject to certain limits regarding crypto-related activities.
As of February 7, 2023, the Federal Reserve Board issued a policy statement reiterating its ability to limit state member banks from engaging in certain crypto-related activities. The ruling influenced the rumored rejection of Protego and Paxos’ applications to become the National Trust Bank, the investigation of crypto firms (Paxos by the New York Department of Financial Services), and several bank policy changes (fewer transactions with crypto firms).
1. Concerns regarding fraudulent financial activities
The US government has expressed concern about the risk of fraud, scams, money laundering and terrorism financing in the crypto industry, and this concern is not unfounded. According to Europol’s ChipMixer investigation, cryptocurrency mixers linked the laundering of approximately 152,000 BTC (worth more than $2.9 billion at current estimates) to sex and illicit goods trafficking, dark web markets, ransomware groups and more.
Several crypto organizations have falsely claimed federal deposit insurance and made other misleading disclosures that have harmed retail and institutional investors. As a result, the Federal Reserve Board has concluded that crypto activities are inconsistent with safe banking practices.
2. Risks associated with crypto assets
For some time now, the US government has clamped down on the significant volatility in the crypto market, as most digital assets are largely influenced by speculation and sentiment rather than real-world goods and services.
Another concern is the risk of stable coins creating deposit outflows for banks holding stable currency reserves. For example, after the collapse of Silicon Valley Bank (SVB), USDC issued by Circle was decoupled from USD because SVB held USDC reserves. The US government is concerned about situations where a decline in the crypto market affects bank holding reserves.
Furthermore, the lack of government oversight, accounting requirements, and the open, public, and decentralized nature of the network have been said to open the crypto industry to cyber security, asset market, counterparty risk, and illegal financial risks, and so do governments. Do not want these risks to be transferred to the traditional banking system.
3. Welfare of crypto investors
Many retail investors have suffered massive losses, especially due to their ignorance of crypto firms and basic crypto risk control practices. The US government intends to ensure that cryptocurrencies do not undermine the financial stability of investors.
Recognizing the need for technological innovations, the government intends to introduce safeguards to ensure that crypto benefits all investors. Till then, the agencies are redoubled efforts to protect retail and institutional investors.
You need banks to bring real world money into the crypto industry and spend crypto in the real world. And the lack of access to the traditional banking system makes it difficult for investors to buy and sell crypto. For example, in February 2023, Binance temporarily halted USD bank transfers, making it difficult to buy and sell crypto assets.
2. Increased risk and volatility
There is no central bank controlling the supply in the crypto market, so crypto is incredibly volatile. However, many crypto organizations hold cryptocurrency stablecoin reserves to maintain some stability. But this will prove difficult with government action.