The U.S. Federal Reserve (Fed) will make it harder for digital asset–related companies to access the payments system and bank accounts, according to Caitlin Long, founder and CEO of Avanti, a cryptocurrency bank.
“It looks like the crackdown has begun. I don’t know how it will end, but it will not directly affect Bitcoin, Ethereum and other cryptocurrencies—the base networks will keep producing blocks. It will affect intermediaries and access points to the U.S. dollar,” Long wrote.
1/ THREAD ABT REGULATORY NEWS in #crypto, which I’ve been chronicling on twitter since April. Seems crackdown has begun. I dunno how it’ll turn out but:
* it won’t impact #BTC #ETH etc directly. Base layers will keep addin’ blocks
* it’ll impact intermediaries & US$ access points— Caitlin Long 🔑 (@CaitlinLong_) July 13, 2021
In her words, on July 13 a landmark industry event occurred—the public-comment period on the Fed’s proposed supervisory principles for assessing requests for access to banking accounts and the payments system has closed.
The guidance responds to the growing number of fintech firms seeking to use central-bank services. The document does not mention the cryptocurrency market, but Long believes the changes will also affect it.
“Why does direct access to the Fed’s payment system matter? Let’s go back to basics. Many industry startups were de-banked in autumn 2017 when banks broadly blocked accounts tied to crypto. Didn’t matter whether biz was legit or scam—all were de-banked”
— Caitlin Long 🔑 (@CaitlinLong_) July 13, 2021
The risk of being cut off from the banking system was mentioned by the Bitcoin exchange Coinbase in its application for a direct listing of its shares.
The founder of Avanti added that for many startups, having strong ties with banks was a “decisive factor.” She also noted that the digital-asset industry would have fared far worse if institutions like Silvergate and Signature had left the market.
“Our industry is growing rapidly—it needs many deposit channels. For our sector it is important that law-abiding companies can directly access U.S. dollars themselves. It’s not just about eliminating multi-tier fees […]. It’s about consciously preserving our own banking access, not subject to the whim of some faceless manager,” she stressed.
9/ It’s also abt being responsible to keep our own banking access, not being at whim of a faceless manager somewhere. While most fintechs don’t need to worry abt being de-banked, memories of 2017 still cause EVERY #crypto co to diversify w/ multiple bank relationships,even today.
— Caitlin Long 🔑 (@CaitlinLong_) July 13, 2021
Long said that one of the industry’s current problems is the “forced separation” of banking and cryptocurrency services. Such a state of affairs creates risks for both sectors.
In comments on the Fed’s proposal, Avanti outlined its position on these threats in detail. In particular, the crypto bank noted that providing access to the payments system to crypto companies carries fewer risks than permitting banks to hold digital assets.
Avanti believes the Fed could mitigate the threats by promptly adopting the supervisory principles and approving “qualified applicants,” including from the cryptocurrency space.
“Please understand that the Fed’s primary job is protecting payment systems from losses, not monetary policy,” Long noted.
12/ If you read it, pls understand Fed’s #1 job isn’t monetary policy—it’s protecting pymt systems against loss. Hence the focus of our letter. It’s also a key reason why #Wyoming #SPDI banks are structured as they are—to minimize pymt system risk for banks that handle #crypto.
— Caitlin Long 🔑 (@CaitlinLong_) July 13, 2021
In Long’s view, banks want the Fed to block access to its services for everyone not in their club. Fintechs seek to hook into the payments system without the costs associated with a banking licence.
“No crypto company works directly with the Fed. Some have the right to their own accounts in American banks; all others must operate indirectly via offshore banks or through multi-layer arrangements between fintechs and banks,” Long added.
According to her, this situation harms the Fed itself—the regulator cannot control hidden risks to the payments system. Moreover, banks processing Bitcoin transactions face settlement risks.
18/ There are HUGE differences in settlement speed & irreversibility btwn #crypto & US$, which creates bank run risk for banks handling crypto. The issue isn’t #Bitcoin, #Ethereum or other crypto protocols—they’re just fine.💪The risk comes from the banks’ operational processes.
— Caitlin Long 🔑 (@CaitlinLong_) July 13, 2021
In November 2020, the Wyoming State Banking Board unanimously approved Avanti’s charter and business plan, granting it status as an official financial institution.
In March 2021, Fed Chair Jerome Powell stated that Bitcoin could replace gold, but not the U.S. dollar. In his words, crypto assets are not useless as stores of value and means of payment.
In June, the U.S. central bank named the stablecoin Tether “a challenge” to financial stability.
Later, Deputy Fed Vice President Randall Cowles noted that properly structured “stablecoins” will deprive CBDC development of any meaning.
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