FDIC Letters to Banks About Cryptocurrency Alleged to Show Government Interference
WASHINGTON — Copies of letters released Friday by the Federal Deposit Insurance Corporation are being interpreted by the cryptocurrency industry to mean the bank regulator was trying to interfere with development of the market.
The FDIC sent the letters to the nation’s banks in 2022 telling them to pause the development of certain crypto products and services.
The letters were prepared by the FDIC’s risk and consumer protection divisions, which sometimes have characterized bitcoin, ethereum and other cryptocurrency as risky investments.
Coinbase Global Inc., a cryptocurrency exchange platform, sued the FDIC for information about how the agency might have interfered with market development of the digital currency.
The FDIC released a first round of the letters publicly in December in response to the Coinbase Freedom of Information Act lawsuit.
Coinbase argued in its lawsuit that the more than 20 letters might reveal a “deliberate and concerted effort by the FDIC and other financial regulators” to keep cryptocurrency out of the banking system.
One set of letters directed banks to hold off on helping customers to buy, hold and sell cryptocurrency. Other letters said banks should wait for government approval before holding customers’ deposits of stablecoins.
Stablecoins are a type of cryptocurrency with value tied to a reference asset, such as precious metals or U.S. dollars. Most cryptocurrency has no reference asset, which makes its value more volatile.
After the FDIC released the first set of heavily redacted letters, a federal judge in Washington, D.C., ordered “more thoughtful redactions” before the agency rereleased them.
The second round of the letters released Friday gave more information about FDIC actions that led cryptocurrency exchanges to claim they were “de-banked” or were forced into account closures by financial institutions.
The FDIC denied that it was trying to interfere with development of cryptocurrency, saying instead that it was merely subjecting the digital asset to the same degree of regulation as any other financial product.
The “pause” letters were intended to give the agency more time to evaluate regulatory concerns about cryptocurrency, the FDIC said.
Paul Grewal, Coinbase’s chief legal officer, was unconvinced about the FDIC’s sincerity.
The letters “show a coordinated effort to stop a wide variety of crypto activity — everything from basic BTC (bitcoin) transactions to more complex offerings,” Grewal wrote in a post on the social media site X. The addition of two more letters after the judge ordered more information makes it “hard to believe in their good faith,” he wrote.
Release of the pause letters renewed calls for lawmakers to investigate the FDIC’s oversight of cryptocurrency.
Former Senate candidate from Massachusetts John E. Deaton said the FDIC was motivated by a political agenda rather than good financial policy.
“It’s about whether unelected bureaucrats can arbitrarily deny access to essential financial infrastructure, effectively picking winners and losers in the marketplace,” Deaton wrote on X. “It’s about whether government agencies can wield unchecked power to restrict lawful businesses from accessing the critical financial infrastructure necessary to survive and thrive in a free market economy.”
The Coinbase complaints are likely to get a friendly reception as a Republican dominated Congress takes control this week.
Last month, the incoming chairman of the Senate Banking Committee, Sen. Tim Scott, R-S.C, met with David Sacks, the Trump administration’s nominee to lead development of cryptocurrency and artificial intelligence, to discuss the potential for the technology.
Scott said in a statement, “Blockchain technology and cryptocurrency have the potential to democratize the financial world, and I look forward to working with President Trump, David Sacks, and my colleagues in Congress to develop a regulatory framework for digital assets that encourages innovation here in the United States.”
The FDIC provides deposit insurance for bank customers. It also regulates banks to protect customers from risky practices that threaten their deposits.
The lawsuit against the FDIC names History Associates Inc. as a plaintiff along with Coinbase. History Associates is a research firm hired by Coinbase to find more information on possible FDIC interference with cryptocurrency.
The case is History Associates Inc. v. Federal Deposit Insurance Corp. in U.S. District Court for the District of Columbia.
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