Technology is disrupting the U.S. banking industry. Cryptocurrency firms are trying to compete directly with America’s largest banks in pursuit of the financial assets of the country’s households and businesses. But the crypto firms that want to collect customer deposits do not want to be subject to the capital requirements and banking regulations that govern America’s biggest banks. In effect, the crypto companies are trying to become banks without regulatory oversight.
The fight between banks and the crypto industry has grown so intense that America’s leading bank executive, Jamie Dimon, the CEO of JPMorgan Chase, reportedly physically accosted Brian Armstrong, a prominent crypto executive, in a coffee shop in Switzerland. Both executives were attending the World Economic Forum in Davos.
In addition, the Bank Policy Institute, which represents financial giants such as JPMorgan, Goldman Sachs, and Bank of America, is weighing legal action to stop the Office of the Comptroller of the Currency, or OCC, from issuing banking licenses to cryptocurrency companies.
The specific dispute centers on the decision by the OCC to grant national bank charters to financial technology firms such as Ripple, BitGo, and Paxos. Almost always, technological disruption is positive for the country. Innovation increases productivity, and the standard of living rises for all Americans. But that is not the case with the decision by the OCC to grant banking licenses to crypto firms.
These charters would allow crypto banks to operate as if they were traditional banks, with the seal of approval of the federal government. But that would not be true. The crypto firms would not be subject to the capital requirements, liquidity rules, and regulatory oversight under which traditional banks operate.
Yes, it is absolutely true that America’s biggest banks do not want competition from the crypto industry. But there is more to their case than their simply trying to destroy new competition. The typical customer of a crypto bank would likely be unaware of the regulatory framework governing these institutions. The new crypto banks would not have federal deposit insurance, and many customers would not realize that their deposits were uninsured.
That matters because a few banks, traditional or crypto, inevitably always fail. They fail either due to mismanagement or, as was the case with the failure of Silicon Valley Bank, outright fraud. Just look at the fraudulent behavior of Sam Bankman-Fried and his FTX exchange, or the OneCoin fraud, in which as much as $4 billion was stolen from private citizens.
When a bank with deposits insured by the Federal Deposit Insurance Corp. fails, bank customers are made whole. If a crypto bank were to fail, customers would receive nothing. Financial failures can lead to financial contagion. Interest rates soar, and the U.S. economy is harmed. The great financial crisis was largely a function of such contagion. If crypto firms want to operate as banks, then they should be regulated just like JPMorgan or Goldman Sachs.
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Ultimately, the law is on the side of the big banks. The immediate legal issue involves paying interest on deposits. Crypto companies can offer customers higher interest rates because their regulatory burdens are lighter and their operating costs are lower. But the language of the GENIUS Act, which currently governs stablecoin issuers, specifically states that interest cannot be paid on deposits made with crypto banks.
We should say no to backdoor banking licenses.
James Rogan is a former U.S. foreign service officer who later worked in law and finance for 30 years. Today, he writes a daily note on markets, economics, politics, and social issues.