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Regulators need a plan for cryptocurrency

Rigorous and thoughtful crypto regulation can make both crypto and banking safer.

Bans on banking crypto are easy but largely unworkable in a digital, global age.Al Drago/Bloomberg

When Satoshi Nakamoto laid out the vision for Bitcoin, they imagined a world where digital money could move between people without banks standing in the middle. But even as crypto’s originating idea sought to bypass banking, today’s marketplace for cryptocurrencies has become inextricably dependent on banks to function smoothly.

Banks provide a home for the US dollars that crypto firms like Coinbase use to make payments between themselves and customers. Banks provide loans, sometimes secured against crypto assets like Bitcoin. Banks have also offered various financial services, advice, and the assurance that crypto firms are supported and monitored by a highly regulated, experienced, and reputable economic actor. Providing such services are a bank’s bread and butter. That banks have done so in this context has helped the crypto market to grow rapidly within the United States, allowing millions of everyday people to interact with it using bank accounts or credit cards.


But the US cryptocurrency market now faces a death spiral owing to its need for banking services. Two phenomena are worth noting. First, with the crypto crisis and the collapse of FTX (as well as other notable firms), regulators rightly have become concerned about allowing banks to engage with crypto businesses. This connection is often fraught with risk. The fall of Silvergate — a go-to crypto banker — was triggered by emptier crypto markets following the FTX collapse as customers fled the chaos and institutions (like exchanges) that once maintained thick deposits scaled back. By December 2022, for example, Silvergate’s noninterest-bearing deposit holdings stood at around $3.9 billion. In September 2022, holdings had been $8.2 billion higher.

Rather than offer guidance or rulemaking about risk mitigation when working with crypto firms, however, bank regulators have instead signaled a blanket disapproval of such relationships — no matter the firm or activity. In January, three regulators declared that banks actively engaging in crypto business activities were, by definition, “highly likely” to fall short of safety standards, pushing many compliance-conscious banks to radically limit or cut ties with customers in the crypto industry.


Regulators have compelling reasons to protect banking from a risky, novel industry like crypto. But closing off or heavily restricting access to US banking also courts problems. Firms have already begun looking abroad for banking partners and payment services. This strategy risks off-shoring customer money, where it will lose the protection of US deposit insurance and make the task of public oversight much harder to implement. US retail participation in crypto markets is unlikely to completely abate.

Domestic crypto bans, in countries like China for example, have proven notoriously tricky to execute. Enthusiasts turn to virtual private networks to gain access to crypto platforms. Major cryptocurrencies like Bitcoin are also typically borderless in their underlying infrastructure, enabling VPNs and creative computing to facilitate trading. Tellingly, despite its ban, China continues to see significant crypto trading activity. In addition, by prohibiting or heavily circumscribing banks from providing services to crypto markets, regulators lose the capacity to use banks as levers to monitor crypto firms (e.g., for money laundering), to safely custody customer assets, and to discipline wayward or inexperienced crypto firms (e.g., through loan covenants). To the extent the United States anticipates being a home to the crypto industry — and this decision is one for policy makers to take transparently — then drastically limiting access to banking services can end up creating a costly set of unintended consequences down the line.


Shoddy bank risk management and the resulting crisis have placed the crypto industry in further peril. In an unexpected plot twist, crypto firms are absorbing the fallout from bank failures, scrambling to save deposits and suffering profound disruption to services. Silvergate and Signature were essential crypto banking bulwarks — each offering a 24/7 US dollar payment network that aligned with the never-closed ethos of the crypto market. The Silvergate Exchange Network, for example, processed about $119 billion between September 2022 and December 2022.

A lynchpin of the crypto market, Circle Internet Financial, issuer of a popular “stablecoin” (a crypto asset that seeks to maintain a one-to-one peg with the US dollar, facilitating payments) was left reeling when $3.3 billion of its deposits with Silicon Valley Bank looked to be in danger as regulators worked over the weekend to decide what to do about protecting uninsured funds. It was also no longer able to use Signature’s payment network, Signet. Panic selling caused its stablecoin to lose its one-to-one peg for a time, trading at 87 cents over that weekend. And with Signet’s future uncertain, Circle’s payments could only be processed when normal business hours resumed on Monday.

Regulators need a plan to better oversee both the crypto market and banks. Facile assumptions about which industry constitutes the greater public risk no longer hold. Crucially, as long as crypto remains a presence within the US marketplace, it cannot be left to its own dangerous devices when dealing with customer money. Simply banning or heavily curtailing US banks from doing business with crypto firms is unlikely to protect the savings of Americans determined to be a part of the crypto ecosystem. Instead, it risks exposing them to the preferences and resourcing of foreign regulators who are unlikely to put American interests over domestic ones — and who may lack the expertise and risk-aversion of US financial supervisors.


Rigorous and thoughtful crypto regulation can make both crypto and banking safer — as well as maintain the United States’ place as global leader in delivering responsive, technical, and innovative regulation. Banks are vulnerable when servicing a crypto market that lacks real oversight. Silvergate is case in point. A regime for classifying crypto assets as “securities,” “commodities,” or “something else”; protecting them through fail-safe custody arrangements; usable disclosures for customers; or systematic processes to supervise exchanges represent just some of the obvious and urgent regulatory needs that can bring crypto risks under greater control.

Bans on banking crypto are easy but largely unworkable in a digital, global age. Rulemaking is hard but necessary to protect the financial system and to flex the power of American regulatory policy around the world.

Yesha Yadav is the Milton R. Underwood chair, professor of law, and associate dean at Vanderbilt Law School.