Court Docs Show Regulator’s Crypto Freeze Was More Warning Than Ban

There has been a quiet uproar happening in the crypto space, and it’s not bitcoin’s surging price.

Rather, it is the ongoing accusations by U.S. crypto exchange Coinbase, as well as other stakeholders in the crypto space, that the Federal Deposit Insurance Corporation (FDIC) has been engaged in deliberating hindering the crypto sector’s access to banking activities.

The crypto sector has for years maintained that it was being barred from U.S. banking services, and the latest airing of grievances comes as the face of crypto regulation in the U.S. is poised to transform with the advent of President-elect Donald Trump’s new administration.

Documents released Friday (Jan. 3) by the FDIC challenge the increasing claims of “debanking” and shed more light on the regulatory mindset governing financial institutions’ relationships with crypto firms. The additional “pause” letters show that the FDIC’s requests to the banks did not preclude them from providing banking services to crypto companies but centered instead around compliance and information requests related to FDIC-supervised financial institutions engaged in or considering engaging in crypto-related activities.

“They show a coordinated effort to stop a wide variety of crypto activity — everything from basic BTC transactions to more complex offerings,” tweeted Coinbase’s chief legal officer on X, going on to call for an investigation by Congress.

Still, while the letters’ contents are contrary to industry complaints of widespread “debanking,” the situation has reignited debates about the uneasy relationship between traditional financial institutions and the emerging crypto-FinTech ecosystem.

Read more: Crypto and FinTech Cry Foul Over Debanking — Could Real Issue Lie in Risk?

Regulatory Compliance Is Crypto Sector’s Elephant in the Room

The released “pause” letters suggest that, from 2022 to 2023, the FDIC advised financial institutions to exercise caution when dealing with digital assets, particularly direct investments or services tied to unregulated crypto activities.

The FDIC’s recommendations were likely not blanket prohibitions but rather risk-based directives, urging banks to thoroughly assess their exposure to crypto-related risks before proceeding. Their issuance took place against a backdrop where a wave of high-profile crypto bankruptcies, scams, and market volatility left regulators wary of systemic risk.

Notably, the FDIC also released an internal document laying out the agency’s formal process for receiving, reviewing and responding to crypto activity notifications. The memo acknowledges the rapidly changing landscape of crypto-assets and the need for a flexible and collaborative approach to supervision. It emphasizes that the list of crypto-related activities is not exhaustive and may be updated as new activities emerge.

The memo references the definition of crypto-related activities as “acting as crypto-asset custodians; maintaining stablecoin reserves; issuing crypto and other digital assets; acting as market makers or exchange or redemption agents; participating in blockchain- and distributed ledger-based settlement or payment systems, including performing node functions; as well as related activities such as finder activities and lending.”

The FDIC did not immediately reply to PYMNTS’ request for comment.

Read more: Regulatory Uncertainty Shifts Middle-Market CFOs’ Focus Toward Compliance and Risk Management

In its own 2024 annual report, the U.S. Financial Stability Oversight Council (FSOC) took care to illustrate the risks of the crypto space to the traditional banking sector. Writing about the issue earlier, PYMNTS argued that while the ongoing debanking claims might resonate with the frustrations held by many corners of the cryptocurrency and FinTech sectors, the reality could be far more nuanced than a political assault on those industries.

“Innovation typically moves faster than regulation, and the growing strain between traditional banks and future-fit FinTech and crypto firms can also be in part chalked up to the inevitable consequence of outdated regulatory frameworks, stricter know your customer (KYC) and anti-money laundering (AML) standards, as well as heightened fraud risks,” that report said.

At the same time, without access to robust banking services, crypto firms can struggle to convert digital assets to fiat, manage liquidity, and support customer transactions. This scarcity of banking partners may drive firms to rely on a shrinking pool of providers, in turn exacerbating vulnerabilities and concentrating risk.

Read also: Why Banks Might Want to Have a Blockchain Strategy

Implications for the Future of Crypto Banking

Traditional banks are highly incentivized to play it safe. The FDIC’s own final consent orders of 2024 show that compliance concerns, particularly around anti-money laundering (AML) and know-your-customer (KYC) requirements, remain a key — and frequently costly — guardrail.

Rather than a coordinated effort to debank crypto and FinTech firms, the current climate may instead reflect the growing pains of a paradigm shift and the complexities inherent in integrating new technologies into established systems.

While allegations of deliberate debanking may resonate with some, the reality likely lies in the interplay of regulatory uncertainty, risk management and the broader evolution of the financial sector.

As the crypto-FinTech space matures, the hope is that collaboration, rather than conflict, will define the relationship between these two pillars of the financial world.