Sen. Elizabeth Warren (D-MA) and Sen. Tina Smith (D-NM) asked the Federal Reserve to examine the banking system’s exposure to cryptocurrencies amid continued fallout from defunct company FTX.
In a letter addressed to Federal Reserve Chair Jerome Powell, the lawmakers noted that cryptocurrency firms have desired the “benefits that come with federal recognition from bank regulators” but have not thus far generated a salient degree of partnerships with major financial institutions. The Democrats asked for information about the central bank’s process for evaluating relationships between banks and cryptocurrency companies.
“Banks’ relationships with crypto firms raise questions about the safety and soundness of our banking system and highlight potential loopholes that crypto firms may try to exploit to gain further access to banks,” Warren and Smith wrote. “While the banking system has so far been relatively unscathed by the latest crypto crash, FTX’s collapse shows that crypto may be more integrated into the banking system than regulators are aware.”
The letter noted that other cryptocurrency companies, such as BlockFi, have also filed for bankruptcy as a liquidity crisis continues to upend the nascent sector. Voyager and Celsius declared bankruptcy earlier this year, while other cryptocurrency firms such as Genesis have indicated the looming possibility of insolvency.
A number of smaller banks, including Silvergate Capital, Provident Bancorp, Metropolitan Commercial Bank, Signature Bank, and Customers Bancorp, have ties to cryptocurrency ventures. Alameda Research, the company controlled by former FTX CEO Sam Bankman-Fried which allegedly pulled customers’ funds from the exchange to make investments, poured $11.5 million into Moonstone Bank, more than doubling its value. The institution has connections with other offshore digital asset ventures.
“Many of these small banks relied heavily on their crypto customers and are now experiencing heightened volatility,” continued Warren and Smith, both of whom serve as members of the Senate Banking Committee. An adjacent letter addressed to Federal Deposit Insurance Corporation Acting Chair Martin Gruenberg likewise inquired whether the agency is prepared to conduct a review of the banking system’s ties with cryptocurrency companies.
Among other data points, the letters requested the names of banks currently providing cryptocurrency services, holding dollar deposits for cryptocurrency-related firms, or facilitating transactions via stablecoin. With respect to Moonstone Bank and Alameda Research, the lawmakers asked whether the latter’s investment constituted “control” of the former under the Bank Holding Company Act.
The House Financial Services Committee is preparing to hold hearings regarding the collapse of FTX, which is based in the Bahamas; members of the Senate Agriculture Committee held a hearing last week with Commodity Futures Trading Commission Chairman Rostin Behnam on increasing federal oversight of the cryptocurrency sector. Officials at the Securities and Exchange Commission have opened a criminal investigation into Bankman-Fried to determine whether the entrepreneur broke the law by transferring FTX customer funds to Alameda Research, according to a report from The New York Times.
Cryptocurrency, a form of decentralized digital money that can be transferred between users’ virtual wallets, has garnered the skepticism of many regulators. JPMorgan Chase CEO Jamie Dimon, comparing the assets to “pet rocks” during an interview with CNBC this week, has raised concerns about “terrorism financing, tax avoidance, sex trafficking,” and other ways in which cryptocurrencies enable illicit activities.