Congress Weighs Permanent Rules on Banks and Crypto

Regulatory uncertainty has plagued the crypto industry since 2017, with banks and federal regulators repeatedly changing their stance on permitting or restricting cryptocurrency activities. A new report from the Congressional Research Service (CRS) suggests that legislation could provide a more durable solution, reducing the likelihood of frequent regulatory changes.

The report notes that the federal safety net, including federal deposit insurance and the Federal Reserve discount window, creates moral hazard, with risks not fully borne by banks or their creditors. This has led to disagreements on whether crypto activities meet the prongs of the two-prong test applied by regulators, which ask whether an activity is related to the business of banking and whether it poses safety and soundness risks.

Concerns about crypto include pseudonymity, which poses challenges for anti-money-laundering compliance, and markets that are volatile and involve speculation on price movements. Loans collateralized by crypto assets would expose banks to losses if prices fell, and while crypto may not pose systemic risk in isolation, broader bank exposure to crypto markets could increase systemic risk.

Congress is currently considering several bills, including the GENIUS Act and the CLARITY Act, which take different approaches to regulating crypto activities. The report suggests that a permissive stance would raise questions about capital, liquidity, anti-money-laundering compliance, and exposure to crypto-market volatility.