• A U.S. bank regulator has advised banks to avoid direct engagement in cryptocurrency activities for 2022 and 2023.
• The regulator, however, did not instruct banks to stop providing services to cryptocurrency companies.
• This advisory comes amidst claims by Coinbase and other crypto companies of a concerted effort by U.S. bank supervisors to cut off crypto companies from the traditional financial system.
• The incoming Trump administration is expected to outline a broad crypto policy overhaul, potentially easing regulations on the sector.

In a recent development that has sent ripples through the financial sector, a U.S. bank regulator has issued a cautionary advisory to banks. The regulator has suggested that banks should refrain from directly engaging in cryptocurrency activities for the years 2022 and 2023. However, it is important to note that the regulator did not instruct them to cease providing banking services to cryptocurrency companies. This move contradicts industry complaints of widespread debanking. This information was revealed in documents released on Friday.

The Federal Deposit Insurance Corporation (FDIC) found itself under the judicial scanner when a judge ordered it to provide versions of supervisory pause letters it had sent to unidentified banks. This order came after History Associates Incorporated, a research firm hired by cryptocurrency exchange Coinbase, sued the agency for the release of these letters. The FDIC initially released the letters in December but was instructed by the judge to resubmit them with more nuanced redactions.

The Crypto Controversy: Coinbase's Campaign

The new batch of 25 letters includes two additional letters sent to unidentified banks that were not included in the original FDIC submission. This litigation is part of a larger campaign by Coinbase and other cryptocurrency companies. They aim to expose what they believe to be a concerted effort by U.S. bank supervisors to cut off cryptocurrency companies from the traditional financial system. Paul Grewel, Coinbase's chief legal officer, stated in a post on Friday that the less redacted letters show a coordinated effort to stop a wide variety of crypto activity and called for further investigation by Congress.

In response to these claims, the FDIC also published a 2022 internal memo on Friday. The memo details how supervisors should assess queries from lenders looking to directly deal in crypto assets, versus offering banking services to crypto companies. The documents provide a rare glimpse into the confidential bank supervisory process. They suggest that while FDIC examiners have been cautious towards the crypto sector, which has been beset by scams, bankruptcies, and volatility, they did not order banks to entirely cut off the crypto sector.

The Trump Administration: A New Crypto Policy Overhaul?

These developments come weeks before President-elect Donald Trump's incoming administration is expected to outline a broad crypto policy overhaul. Trump is expected to issue an executive order directing bank regulators to go easier on the sector, potentially as early as his Jan. 20 inauguration. Several of the FDIC letters show staff directed banks to either pause entering crypto initiatives or refrain from further expanding client crypto services. In others, the FDIC required banks to answer detailed questions before proceeding further with crypto ventures.

The internal memo distinguishes between a bank engaging directly in crypto activities, like holding crypto assets in custody, and offering traditional banking services for crypto clients, like lending and providing deposit accounts. The first category requires stricter scrutiny, it says. The memo echoes comments made in December by FDIC Chairman Martin Gruenberg, who told reporters the agency does not debank crypto firms in terms of access to bank accounts, but direct crypto engagement by banks is a subject of supervisory attention.