Community Banks Are Crypto's New Challenge

As it stands, small, community banks are the darlings of Washington's financial services bubble - adored and protected by policymakers on both sides of the aisle. A member of the Federal Reserve Board who has experience in community banking is even required by law.

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With the growth of cryptocurrency in recent years, the tiny but powerful lenders have been faced with a new test to the depth of their Washington clout: convincing lawmakers and regulators to rein in the industry.

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As outlined in the legislative agenda that the Independent Community Bankers of America released earlier this week, the push is aimed at strengthening the financial system. This urged lawmakers to take a close look at the "inadequate" oversight of crypto by the regulatory agencies, and to resist any efforts to allow nonbank stablecoin issuers to have access to the Fed's payment systems.

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As president of the group's congressional relations team, Paul Merski is blunt about the group's position: "We don't think it should be included in the traditional banking system and lumped into that." According to ICBA, it poses a threat to the financial industry and lacks adequate anti-money laundering protections.

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Cryptocurrency is not a new concept anymore," said Merski to MM. "What is it that it has solved for us?" he asked. As a matter of fact, it's become something that's mostly used for financial speculation and mostly used for criminal activity, if anything. As a crypto sector, it's up to them at this point to prove that they are safe, secure, and superior, and I do not think that they have done that so far."

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There is a challenge to startups that believe that digital asset services can provide a beneficial financial alternative, including stablecoins, which are said to enable cheaper, faster, and more convenient international payments for startups. There have been some who have floated the idea of becoming their own banks.

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In ICBA's opinion, the position of the group is important because it represents a wide range of lenders throughout the U.S. - that is, about 99 percent of all banks, according to the group.

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“It is important to note that we do not draft legislation, but we are probably often the first trade association members turn to for advice and opinions in terms of the legislation,” Merski said.

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There are concerns raised by the ICBA that are shared by congressional crypto skeptics such as Senator Elizabeth Warren. A bipartisan bill has been introduced by the Senator that would strengthen anti-money laundering regulations around crypto activities, something that Merski called a "very important approach." The think tank Coin Center has called the bill an attack on the privacy and freedom of crypto users and developers.

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In the post-FTX era, digital asset firms face a number of political hurdles as they try to influence policy as they attempt to influence market conditions.

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“Cryptocurrencies were an attempt to function like a kind of a system outside of the system,” explained Merski. 

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“Having said that, I'm suspicious that they are clamoring to get regulated as soon as possible. Until recently, their competitive advantage was that they were not regulated, and that was their competitive advantage. The consequences of that have been seen by all of us."

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There is no doubt that some banks would like to have a go at crypto. As part of its push for a more robust oversight of nonbank crypto companies, the American Bankers Association has also been advocating for traditional banks to offer digital asset options, particularly in the area of custody services, to their clients.