Banks Want to Crash the Bitcoin Party. Trump Is Opening the Door. — Barrons.com

By Joe LightThe last time crypto collapsed, regulators celebrated that the country's biggest banks had few ties to Bitcoin and other digital assets, leaving them unscathed. Next time may be different.After years of being stymied by the Biden administration, banks might soon get a green light from President Donald Trump and his top officials to start offering cryptocurrency services. Trump, who has launched his own token, is creating a pro-crypto government. Banks that were shut out of the industry are poised to join it, vying with firms like Coinbase Global, Robinhood Markets, and BlackRock for a piece of the crypto pie.The Federal Deposit Insurance Corp. plans to revise bank guidelines for crypto, aiming to allow banks to embark on some crypto activities without getting regulatory permission first. Some banks have met with government officials to push for offering custody of crypto assets, along with "tokenized deposits" that could put some checking accounts on blockchains, according to a person familiar with the matter."If the rules come in and make it a real thing that you can actually do business with, you'll find that the banking system will come in hard on the transactional side of it," Bank of America CEO Brian Moynihan said in a CNBC interview at the World Economic Forum in Davos, Switzerland, describing crypto as "just another form of payment."Banks aren't entirely shut out of the crypto world, but allowing them to offer far more services and put deposits on blockchains would be a stark departure from Biden's administration, which actively discouraged ties between banks and crypto. It would also be an about-face for independent regulators who have long worried about crypto's uses for illicit activities and potential to destabilize the financial system.Every major banking regulator — independent entities in the federal government — has raised alarms. The Federal Reserve, the Office of the Comptroller of the Currency, and the FDIC in 2023 issued a joint statement saying crypto raised "significant safety and soundness concerns" for banks. The regulators also required banks to get permission before embarking on significant crypto projects. Now — at least for some activities — that approach is going out the window.The push is moving forward despite Trump having not yet appointed permanent leaders for the regulators, which are supposed to operate independently from the administration. The FDIC has a five-member board, with Republican Travis Hill as acting chair. Biden holdover Michael Hsu runs the OCC, though he's expected to be replaced by Trump at any time. Changes might come slowest at the Fed Board, where Chair Jerome Powell's term lasts through 2026."The industry is working with policymakers to remove the guardrails in the banking system that kept banks out of crypto," said Mark Hays, an associate director at Americans for Financial Reform, a Wall Street watchdog that's been critical of the crypto industry.Banks say they can put up safeguards, and they no longer want to be shut out of crypto services and underlying blockchain technology — arguing it could help them reduce their own costs, speed up payments, and generate new sources of revenue.So far they have taken baby steps. JPMorgan Chase, for instance, launched "JPM Coin" in 2019, an internal token to settle payments between clients, though its volume pales in comparison to traditional transaction methods. Goldman Sachs Group last year said it planned to spin out a blockchain-based platform that could be used to tokenize and trade real-world assets, like real estate. Citigroup has experimented with Wellington Management and WisdomTree to tokenize private funds.The Bank Policy Institute, an industry lobbying group, said banks are "ideal vehicles for exploring the benefits of new technology like blockchain," in a paper after the November election.Even if big banks start delving more into crypto, it's unlikely to move the needle on their asset bases or financial results — which are far more tied to loan growth, net interest income, and balance sheets. But with few exceptions, banks have left lucrative businesses like brokerage services, custody, and dollar-tied tokens to upstarts like Coinbase, Robinhood, and Anchorage Digital.The push by banks also stems from the wild success of spot-based Bitcoin exchange-traded funds. Launched about a year ago, the ETFs have swelled to about $120 billion in assets, earning fees for managers like BlackRock and Fidelity as well as the custodians of the underlying Bitcoin, like Coinbase.Crypto firms, meanwhile, are encroaching on a core activity in banking: taking deposits, lending some out, and earning a yield on the reserves held against them. The way that works in crypto is with stablecoins — tokens pegged to the dollar that can be used in transactions, lent as collateral, and deposited in accounts that yield interest. The tokens collectively have a market value of more than $227 billion, earning considerable interest for companies like Coinbase, Circle Internet Financial, and Tether Holdings.To compete with stablecoins, some banks this year met with senior FDIC officials to talk about potentially offering "tokenized deposits," among other things, according to people familiar with the matter.Tokenized deposits are essentially tokens that represent traditional deposits in a checking or savings account and can be transferred almost instantly on a blockchain, the digital ledger underlying most crypto assets. Banks say can it can reduce their costs. Integrated with other blockchains, tokenized deposits can also be used more seamlessly for crypto trading, lending, and other activities.The FDIC, under Hill, is considering making it easier for banks to offer custody services. And the FDIC is considering rescinding or reworking guidance that had required banks to get permission for crypto-related activities, instead offering upfront guidance on how banks can use the technology."We are actively reevaluating our supervisory approach to crypto-related activities," Hill said in a statement on Wednesday, adding that the agency sought to give "a pathway for institutions to engage in crypto- and blockchain-related activities while still adhering to safety and soundness principles."Financial watchdogs say major safeguards will be needed to avoid a sequel to the crash of 2022 — when a wave of corporate crypto failures bled into the banking system, leading to the demise of Silvergate Bank and Signature Bank. In its autopsy report on Signature, the FDIC attributed its failure in part to its "strategy of rapid growth and expansion into the digital asset markets.""Real people's money is at stake," said Shayna Olesiuk, director of banking policy at industry critic Better Markets, pointing to the failures of Silvergate and Signature.Some financial-stability experts think it can be done safely, and argue that letting large banks into crypto might actually be positive. One reason Silvergate failed is because it had a disproportionate amount of crypto depositors and was known as a "crypto bank." When FTX collapsed, Silvergate depositors panicked, causing a run. That risk might be alleviated if more crypto deposits were held at bigger banks, constituting only a small part of their liabilities, says Steven Kelly, associate director of research at the Yale Program on Financial Stability."If the crypto industry can mature and the regulations around it can mature enough, that's a safer outcome than having institutions known as crypto banks," he says.Banks, of course, are eager to tap the digital-asset profit pool as a new pro-crypto federal government takes shape. Trump signed an executive order to create a crypto "working group" to study pro-crypto policies, including the potential creation of a federal Bitcoin stockpile. The Securities and Exchange Commission now has its own crypto working group, led by Commissioner Hester Peirce, nicknamed the "Crypto Mom" for her pro-industry views.Republicans in Congress want to move forward with bills that would establish rules for stablecoins and brokerages/exchanges like Coinbase. Republican lawmakers also sound sympathetic to claims by crypto executives that they had been "debanked," or denied basic banking services, merely because of the industry they worked in.The Biden administration "was explicit about not wanting crypto to touch the banking system, period," said J.W. Verret, a law professor at George Mason University. With Republicans, "that war is over."Write to Joe Light at [email protected] content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.