Customers Bancorp operates a 24/7 DLT-based payment system, Customers Bank Instant Token (CBIT), which is used by many companies in the digital asset sector, including Galaxy Digital, Coinbase, Circle, Gemini and Kraken. Yesterday the U.S. Federal Reserve issued an enforcement action against the bank relating to weak risk management and anti-money laundering processes in its digital asset activities. The central bank didn’t impose a fine and said that Customers has already started to address the AML issues.
Within 60 days the bank has to submit plans to the Federal Reserve regarding improving its risk management practices for its digital asset strategy and a revised compliance program for Bank Secrecy Act and AML requirements.
Banks that serve the digital asset sector attract a lot of regulator attention. Last year Silvergate Bank shuttered voluntarily in an orderly fashion after it survived mass withdrawals following the crypto crash. Signature Bank was also popular with the digital asset sector, but far more diversified. It was amongst the banks that failed during March last year.
Both banks offered similar instant payment systems to CBIT. Signature’s Signet payment system and CBIT use TassatPay technology.
Because there are so few banks willing to engage with the digital asset sector, there’s a tendency for banks that are supportive to attract a lot of digital asset clients. Another driver is the 24/7 DLT payment systems which crypto firms need, given the nature of their business. However, so far those payment systems are limited to payments within a single bank, which is why the banks become magnets for similar clients. That concentration in a risky sector is challenging for any bank.
How to address digital asset concentration risks
There are solutions that would help to address that concentration, but so far regulators are not keen.
One is to allow some of the crypto banks, such as Custodia, to have a Federal Reserve account.
Alternatively, if the instant DLT payments didn’t have to happen within the same bank, then digital asset clients could be spread across the broader banking sector.
For more than two years, Tassat and the USDF Consortium have been trying to launch separate interbank tokenized payment networks, not targeted at crypto clients. Customers Bank was one of three banks involved in the unveiling of Tassat’s Digital Interbank Network (DIN). So far the regulators are not supportive.
Hence, the digital asset concentration will likely persist. The degree of attention banks receive for digital asset activities means most banks won’t be interested unless they decide to make it a focal activity. That means the pool of supportive banks continues to shrink.
There are two very different perspectives on what’s happening. The digital asset world considers this as de-banking. And view central bankers as threatened by crypto innovations.
Central bankers will argue they’re just making sure the banks are managing risks.
Globally, central bankers consider the volatility of digital assets as a potential financial stability risk to the traditional financial system. The reason it is ‘potential’ is the limited interconnectivity between the two worlds. Theoretically, the crypto markets should become less volatile as they mature.
One could argue that the central banks are trying to hold back the tide. Using a summer analogy, perhaps the central banks are trying to delay things enough so the tides are like tepid Mediterranean ones rather than scary Atlantic ones.
