Banks Limit Crypto Exposure Due to AML Concerns

Regulatory Challenges and AML Concerns

Banks are increasingly hesitant to engage with cryptocurrencies due to persistent anti-money laundering (AML) concerns. The high liability associated with failing to prevent money laundering, terrorist financing, or sanctions evasion poses significant risks. This uncertainty may deter banks from acting as crypto custodians unless there is a major overhaul of AML regulations.

Debanking and Regulatory Scrutiny

The issue of debanking has gained traction in Washington, with Congress scheduling two hearings to address the challenges crypto firms face in obtaining and maintaining bank accounts. These sessions may clarify regulatory requirements for banks dealing with cryptocurrencies, as suggested by the Office of the Comptroller of the Currency (OCC). The debate has intensified following the FTX collapse and warnings from agencies like the Federal Reserve and OCC about crypto-related risks.

The Need for AML Reforms

AML concerns are also discouraging banks from issuing stablecoins, as the potential liability for misuse by malicious actors remains a significant concern. Broad reform of AML rules is essential to give banks confidence that tokens are not linked to illicit activities.

Industry Reactions and Broader Context

The crypto industry has faced allegations of a coordinated crackdown, referred to as "Operation Choke Point 2.0," drawing parallels to an Obama-era initiative targeting high-risk industries. Coinbase has sued the FDIC, alleging isolation of the crypto industry from banking services, though the FDIC maintains that banks are not prohibited from serving legal customers.

Major bank CEOs, such as JPMorgan Chase's Jamie Dimon, have highlighted the challenges of engaging with crypto firms due to the risk of substantial fines. Federal Reserve Chair Jerome Powell has emphasized that banks can work with crypto customers if they can effectively manage associated risks.

The ongoing regulatory uncertainty and AML concerns continue to shape the relationship between banks and cryptocurrencies, with significant implications for the future of the industry.