Washington, D.C. – U.S. Senators Tina Smith (D-Minn.) and Elizabeth Warren (D-Mass.), members of the Senate Banking, Housing, and Urban Affairs Committee, sent letters to three key banking regulators raising concerns about the ties between the banking industry and crypto firms following FTX’s bankruptcy. The senators are asking each regulator, the Federal Reserve (Fed), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC), how they assess the banking system’s exposure to crypto risks.
“(I)t appears that crypto firms may have closer ties to the banking system than previously understood,” wrote the senators. “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.”
Earlier this month, FTX, once one of the world’s largest crypto exchanges valued at $32 billion, its sister company Alameda Research, and 130 affiliated companies declared bankruptcy, triggering a crisis in the crypto market – tanking crypto values and dragging other crypto firms down. The senators note that these companies were not deeply integrated into the traditional banking system, sparing millions of people from potential turmoil – though reports show that crypto firms may have closer ties to the banking system than previously known.
Alameda, which reportedly funneled $10 billion from the FTX exchange and into its own coffers under a scheme coordinated by Sam Bankman-Fried and other FTX and Alameda executives, made an $11.5 million investment in Washington state-based Moonstone Bank – more than double the bank’s worth at the time – which could be seen as a move to bypass the requirements of having a banking license.
Other federally-regulated banks – including Deltec Bank, Silvergate Capital Corp., and Signature Bank – have all come under scrutiny for relying heavily on crypto customers and are now experiencing increased volatility. Silvergate’s average deposits quarter-to-date are down more than $2 billion since September and deposits from crypto firms accounted for 90% of the bank’s overall deposits.
Given these reports of banks’ relationships with crypto firms and potential loopholes that crypto firms may exploit to gain access to the banking system, Senators Smith and Warren are asking the Fed, FDIC, and OCC to answer a set of questions about their current assessments of the relationships between the banking system and crypto firms, and the risks these relationships pose by December 21, 2022.
Senator Smith has been an outspoken advocate for regulation and oversight of crypto to protect consumers, the environment, and the safety and stability of the financial system.
In May 2022, Senators Smith and Warren sent a letter to Fidelity, asking the company to explain its decision to allow Bitcoin investments for 401(k) plans, despite the Department of Labor’s warnings about 401(k) crypto investments.
You can read a copy of the letters here.