TD Cowen's Washington Research Group, led by Jaret Seiberg, issued a note cautioning that banks are likely to restrict their exposure to cryptocurrencies as long as anti-money laundering (AML) concerns persist.
The investment bank highlighted the high liability banks face if they fail to prevent money laundering, terrorist financing, or sanctions evasion. This need for legal clarity could deter banks from acting as crypto custodians without a significant overhaul of AML regulations.
Congress is set to conduct two hearings this week addressing the issue of debanking, with one in the Senate Banking Committee on Wednesday and another in the House Financial Services Committee on Thursday. These sessions may address regulatory requirements for banks dealing with crypto, as suggested by the Office of the Comptroller of the Currency (OCC).
The debate over crypto debanking has intensified in Washington, especially after calls from lawmakers for investigations into the matter and complaints from crypto firms about the difficulties in obtaining and keeping bank accounts in the U.S. This scrutiny follows the FTX collapse in late 2022 and subsequent warnings from various government agencies, including the Federal Reserve and the OCC, about the risks associated with crypto-assets.
The OCC is considering whether to revoke the requirement for banks to obtain approval before participating in certain crypto-related activities. However, Seiberg believes that removing this requirement would be a mistake, as banks will likely continue to limit their involvement with cryptocurrencies due to the significant penalties associated with AML violations.
AML concerns are also dampening banks' eagerness to issue stablecoins, given the potential liability if those stablecoins are misused by malicious actors. Seiberg emphasized that a broad reform of AML rules would be necessary for banks to feel confident that tokens were not previously connected to illicit activities.
The broader context of crypto debanking includes allegations of a coordinated crackdown by government agencies, referred to as "Operation Choke Point 2.0" by Nic Carter of Castle Island Ventures. This term draws a parallel to an Obama-era initiative aimed at restricting banking services to certain high-risk industries.
Notably, last year, Coinbase (NASDAQ:COIN) filed a lawsuit against the FDIC, accusing it of isolating the crypto industry from banking services, although the FDIC has stated that banks are not prohibited from serving any specific customer class as allowed by law.
Even major bank CEOs, such as JPMorgan Chase (NYSE:JPM)'s Jamie Dimon, have acknowledged the challenges of engaging with crypto firms, citing the risk of substantial fines. Federal Reserve Chair Jerome Powell recently remarked that banks can work with crypto customers, provided they can adequately manage the associated risks.
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