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A US senator has alleged that a federal regulator is using Obama-era scare tactics to discourage banks from engaging in legitimate business with crypto companies.
Multiple whistleblowers have alleged that a US regulator is using its influence to coerce banks into rejecting legitimate business from crypto-related companies.
The claims came to light following an open letter from Senator Pat Toomey (R-PA), who contacted the Federal Deposit Insurance Corporation (FDIC) in search of answers.
According to Toomey, staff at FDIC’s Washington, D.C. headquarters have urged regional offices to send letters to banks requesting that they refrain from expanding any relationships they may have with crypto companies.
Toomey added that the FDIC has “no legal basis” to send such letters, and that his office has “corroborated” the whistleblowers’ claims.
In one or more cases, according to Toomey, the letters were addressed to banks that had planned to give customers access to a crypto company’s trading platform via the bank’s mobile or internet banking app.
Toomey pointed out that such a relationship would be legal and lawful, providing that bank customers receive clear disclosures that neither the crypto company nor the crypto-assets it offers are FDIC-insured.
“This arrangement appears similar to the common practice of banks partnering with third parties so customers can access services like stock trading platforms,” said Toomey.
The whistleblower reports also allege that the FDIC may be abusing its supervisory powers to deter banks from extending credit to crypto companies.
According to Toomey’s description of these reports, FDIC employees in Washington, D.C. have contacted FDIC regional bank examination staff to question their review of a loan made by a bank to a crypto-related company.
In these communications, it is alleged, FDIC officials in Washington, D.C. urged their regional colleagues to downgrade their classification of the loan.
As Toomey pointed out, it is “highly atypical” for FDIC headquarters personnel to be involved in reviewing an individual loan.
“If reports are true that there was nothing unusual about this loan (other than that it was to a crypto-related company), this episode raises important questions,” said Toomey.
“FDIC regional office staff reportedly interpreted the involvement of FDIC headquarters in this matter as an effort to change how loans to crypto-related companies are generally classified and to deter banks from extending such loans in the future.”
Toomey has asked acting FDIC director Martin Gruenberg to respond to his letter by August 30 with further details pertaining to the allegations.
In a statement quoted by Yahoo Finance, the FDIC said it is “acting consistent with longstanding legal authorities to ensure that banks engaging in crypto-related activities are doing so in a safe and sound way that protects consumers".
“This may involve the FDIC requesting that an institution delay initiating or refrain from expanding crypto-related activities until supervisory feedback is taken into account.
“Given the risks readily apparent in the crypto-asset markets, these are necessary and appropriate actions to take."
Overtones of the Obama era
Elsewhere in his letter, Toomey compared the whistleblowers' allegations to similar actions taken by the FDIC and the Department of Justice (DOJ) as part of Operation Choke Point.
Operation Choke Point was an Obama-era initiative designed to pressure banks into rejecting business from firearms dealers, payday lenders and other “high-risk” companies.
Its stated goal was to prevent fraud and money laundering, but similar to what Toomey’s whistleblowers allege, the FDIC was accused of using extra-legal means to discourage banks from engaging in legitimate business.
After being exposed by the Wall Street Journal in 2013, Operation Choke Point was officially shut down in 2017.
In the years that followed, the FDIC settled multiple lawsuits brought by payday lenders who alleged that the regulator had engaged in “retribution” against lawful businesses.
In the settlements, the FDIC agreed that it would no longer issue “informal” or “unwritten suggestions” to banks, and would offer “additional training” for FDIC examiners.
Feds focus on crypto companies
Prior to Toomey’s letter, the FDIC had issued its own statement on supervision of crypto-related activities among regulated institutions.
In April, the FDIC published an open letter in which it urged banks and other institutions it oversees to contact the regulator before engaging in a “crypto-related activity”.
The FDIC added that it would assess the information provided by banks to check the "safety and soundness" of the proposed activity, and would provide feedback if necessary.
A similar letter was published last week by the Federal Reserve, which directed banks under its supervision to contact the Fed before engaging in crypto-related activities.
As previously reported by VIXIO, the letter stressed that crypto services “may pose risks related to safety and soundness, consumer protection, and financial stability”.
