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A US regulator is caught warning banks against dabbling in crypto, the head of the CFTC resigns, and the creator of TerraUSD is (finally) extradited to the US to face trial.
The US Federal Deposit Insurance Corporation (FDIC) has been forced to publish 79 pages of unredacted letters in which it urged members to stop offering crypto-banking services.
The letters, which the FDIC published last Friday (January 3), show that the regulator told banks on more than 20 occasions to “pause”, “refrain from offering” or to “not proceed” with crypto-related products and services.
The FDIC was forced to publish the letters in response to a lawsuit filed in June last year by Coinbase.
As stated in the lawsuit, Coinbase came to know of the so-called “pause letters” in October 2023, as a result of a report on crypto-asset risks by the FDIC’s Office of Inspector General (OIG).
In the report, the OIG criticised the FDIC for writing the letters, arguing that they were inconsistent with the agency's previous guidance on crypto-related activities.
It also said that the letters created a “risk that the FDIC would inadvertently limit financial institution innovation and growth in the crypto space”.
The FDIC had been sending these letters since early 2022, but Coinbase did not initiate legal action against the regulator until 2024.
First, in partnership with research firm History Associates, Coinbase submitted a Freedom of Information Act (FOIA) in an effort to obtain copies of the letters.
The FDIC denied that request, so Coinbase sued the FDIC to compel compliance with the FOIA.
“For nearly two years, a wide array of federal financial regulators have used every regulatory tool at their disposal to try to cripple the digital asset industry,” the plaintiffs state.
“This FOIA lawsuit seeks to bring to light the FDIC’s role in that unlawful scheme.”
In Coinbase's view, the pause letters are part of a “deliberate and concerted” effort by US regulators to pressure financial institutions into cutting off crypto firms from the banking system.
In the lawsuit, Coinbase notes that regulators have engaged in this type of interference before, during Operation Chokepoint.
From 2013 onwards, agencies led by the Department of Justice (DOJ) attempted to “bully” US banks into terminating their relationships with payday lenders.
Initially, Operation Chokepoint was a covert regulatory initiative, which only came to an end in 2017 following a congressional investigation.
As covered by Vixio, Coinbase and other technology and crypto firms feel that they are now victims of an “Operation Chokepoint 2.0”.
Paul Grewal, chief legal officer at Coinbase, said the FDIC’s letters prove that Operation Chokepoint 2.0 is not “just some crypto conspiracy theory”.
“Law-abiding American businesses should be able to access banking services without government interference,” he posted on X.
“The incoming administration has the opportunity to reverse so many poor crypto policy decisions, chief among them politically motivated regulatory decisions like Operation Chokepoint 2.0.”
CFTC chair calls for federal crypto legislation in final speech
The chair of the Commodity Futures Trading Commission (CFTC) has urged Congress to draft federal legislation to ensure that crypto investors enjoy the same protections as investors in other asset markets.
Rostin Behnam, who will resign as CFTC chair when President Trump takes office, used the occasion of his final speech to offer some recommendations to lawmakers, based on his seven years in the post.
Benham said that he has always advocated for the CFTC to address the gap in regulation of crypto-assets that are not securities, and will continue to advocate for CFTC action, if Congress chooses not to legislate.
However, he also warned that the risks posed by the crypto sector are likely to “intensify" in the absence of federal legislation, particularly in areas such as customer protection, fraud and market abuse, and financial stability.
“We’ve seen this before in our history where we leave large swaths of finance outside of oversight and responsibility, and we have seen time and time again that it ends badly,” said Benham.
“American investors, small and large, have demonstrated eagerness to incorporate digital asset products into their portfolios.
“It is our duty to ensure that when they do so, the full protections afforded by our regulatory oversight are in place, and that illegal and illicit conduct is swiftly addressed.”
TerraUSD creator (finally) extradited to US
The creator of the TerraUSD stablecoin has been extradited to the US to face criminal fraud charges, following a lengthy battle with authorities in Montenegro.
Do Hyeong Kwon, 33, is accused of causing more than $40bn in investor losses when TerraUSD and other Terraform Labs crypto-assets collapsed in May 2022.
Last week, when Do Kwon arrived in the US, he also appeared in federal court in Manhattan, where his trial will take place.
However, prosecutors have indicated that the trial is unlikely to commence until 2026 due to the complexity of the case.
In 2023, the South Korean national was arrested in Montenegro, after entering the country using a fake passport.
He was sentenced to four months in prison, after which a lengthy game of diplomatic tennis ensued between the US and Montenegro, which does not have a formal extradition treaty with the US.
Last year, as covered by Vixio, Do Kwon agreed to pay a record-breaking $4.5bn fine to the Securities and Exchange Commission (SEC), after being found liable for civil charges of securities fraud.
