In response to freedom of information requests by Coinbase, the Federal Deposit Insurance Corporation (FDIC) published minimally redacted letters sent to banks requesting information about their crypto activities and in most cases asking them to pause activities pending feedback. Last year, the FDIC’s Office of Inspector General objected that the FDIC had in most cases failed to provide feedback, leaving activities in limbo and impacting innovation.
On behalf of Coinbase, History Associates Inc asserted that the letters demonstrate the FDIC was part of “Operation Choke Point 2.0—a multi-agency effort to de-bank the digital-asset industry.” With one important exception, these particular letters don’t appear to support the de-banking claim. They reinforce the position of blocking banks from engaging with crypto and public blockchains.
Amongst the 25 letters disclosed, most of the banks wanted to offer their customers the ability to buy Bitcoin via their mobile banking apps. Often times, this was an indirect service to be provided by a third party.
The FDIC objects to public blockchain for USDF payments
By far the longest letter related to a planned blockchain-based fiat payment system to be operated by a consortium of banks. Despite five pages of tightly typed questions, which undoubtedly were answered, that consortium has so far only participated in Regulated Settlement Network simulations.
While the redactions removed the identities of the bank, we can confirm that the letter relates to the USDF Consortium, which originally planned to launch a payment system using a private protocol on the Provenance public blockchain. On first reading, we suspected the letter related to USDF, because around this time the consortium shifted to a permissioned blockchain approach in a vain attempt to get approval. The use of the term ‘digital markers’ was the final confirmation, given this terminology is specific to USDF.
The letter indicates that the FDIC was interested in the roles of the non bank participants and their involvement in validating transactions. It also had questions about the use of the Hash cryptocurrency and whether banks would need to hold it, although the name ‘Hash’ was redacted.
Given this was before the launch of Fed Now, the FDIC asked the valid question about out of hours liability risks between banks for payments.
SAB 121 – custody
One of the most contentious crypto issues has been the SEC’s SAB 121 accounting rule, which prevented banks from providing cryptocurrency custody, although that certainly worked in Coinbase’s favor. The crypto exchange has dominated custody for ETFs. While it has been claimed SAB 121 was formulated by the SEC without consulting other regulators, in many of the letters the FDIC asks for the bank’s analysis of SAB 121 and it’s applicability. This is a not-so-subtle way of saying, ‘you cannot provide custody’.
Other takeaways
Not all letters were equal. Apart from the USDF letter, there were three that stood out. One bank was being quite pushy, saying that it planned to launch crypto services on a specific date. It had clearly provided extensive information to the FDIC already. The FDIC’s list of questions was far longer than for other banks, querying every claim the bank made, asking for evidence.
Moving on, when assessing risk, there’s the accounting concept of materiality. In other words, don’t focus on the small, irrelevant stuff. One bank spent $25,000 on an NFT. There were numerous detailed questions about this particular purchase.
Letter number 25 relates to a bank that wanted to provide deposit account services to a stablecoin but was told to wait for feedback. It is the only letter in the group that appears to block banking services. The New York-based bank first wrote to the FDIC a few days after Circle’s USDC stablecoin lost its peg in March 2023, following the collapse of Silicon Valley Bank.
