A recent report from the Congressional Research Service (CRS) highlights the fluctuating approach of federal banking regulators towards cryptocurrency since 2017. The report suggests that establishing clear legislation could lead to a more stable regulatory environment and reduce frequent changes in guidelines. There is an ongoing discussion in Congress about whether creating a permanent regulatory solution for cryptocurrency activities is preferable to allowing existing regulations to remain in flux.
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A central issue is determining if cryptocurrency-related activities are part of the recognized "business of banking" and whether these activities can occur without compromising bank safety. The report emphasizes that bank losses could affect federal deposit insurance and access to the Federal Reserve's discount window, thus creating a moral hazard where risks are not fully absorbed by banks or their creditors.
The CRS identifies three potential pathways for Congress: deferring to regulators, enacting specific permissions or prohibitions, or a combination of both. Currently, Congress has not comprehensively defined "the business of banking," leaving regulators the authority to decide which novel activities qualify as banking operations. Regulators typically employ a two-prong test: whether an activity is related to banking and whether it presents safety and soundness risks. There is ongoing debate about whether cryptocurrencies fulfill these criteria.
Concerns unique to cryptocurrencies include issues of pseudonymity that complicate anti-money-laundering efforts and the inherent volatility in cryptocurrency markets, which can lead to speculation on prices. Additionally, banks offering loans collateralized by crypto assets face potential losses if asset prices decline. While isolated, cryptocurrencies might not pose systemic risks, their broader implications for bank exposure can increase such risks.
Legislation such as the GENIUS Act (P.L. 119-27) has already permitted stablecoin issuance and custody for bank subsidiaries. The current versions of the CLARITY Act (H.R. 3633) propose different regulatory approaches. The House version would allow banks to use digital assets or blockchain for any lawful activities and extend permissions to certain financial holding companies and subsidiaries. In contrast, the Senate version would authorize 11 categories of cryptocurrency activities for all banking organizations and credit unions, allowing banks to engage more deeply in digital asset markets than is currently allowed in traditional sectors.
The report raises critical questions about the future regulatory landscape, suggesting that regardless of administrative direction—be it expansion or restriction—absent legislative action, the baseline regulatory framework remains susceptible to change. A more permissive stance could invite concerns regarding capital, liquidity, compliance with anti-money-laundering laws, and exposure to market volatility. Furthermore, the document poses a structural question about the validity of distinguishing between banks and nonbank financial entities against the backdrop of expanding bank activities and the increasing prevalence of nontraditional financial firms.