TD Cowen: US banks will continue to restrict cryptocurrency activity without clear AML rules

What’s new? Analysts at investment bank TD Cowen have said that US banks will restrict their cryptocurrency operations as long as there are risks associated with illegal financial transactions. The research team led by Jaret Seiberg explains that banks can act as custodians, but they are waiting for more regulatory clarity given the serious liability for money laundering, terrorist financing, or sanctions evasion.

Material by The Block

What else is known? During Biden’s presidency, crypto firms have not only faced increased scrutiny from market regulators but also problems when trying to open bank accounts. This de-banking of crypto firms became widely discussed after the collapse of crypto exchange FTX in November 2022, when banking regulators issued warnings about “crypto-asset risks.”

In 2024, Coinbase, a leading US crypto exchange, took the Federal Deposit Insurance Corporation (FDIC) to court to release documents on the de-banking of crypto firms, according to which the agency began recommending as early as 2022 that banks not expand their cooperation with companies in the digital asset industry.

Congress will hold two hearings on de-banking this week, one in the Senate Banking Committee on Wednesday and another in the House Financial Services Committee on Thursday. They will likely also discuss cryptocurrency-related requirements of the Office of the Comptroller of the Currency (OCC) within the Treasury Department.

Seiberg allows the possibility that as a result of the hearings, the OCC may remove the requirement that banks must get approval before engaging in certain cryptocurrency activities.

However, he believes that eliminating this requirement would be a mistake, as banks need clear rules. For example, the fines for violating anti-money laundering (AML) regulations are too high for banks to serve the cryptocurrency sector without more broad clarity.

The lack of clarity could also turn banks away from the idea of issuing stablecoins because of potential liability for criminals using these assets.

“It is why we believe the controversy over debanking of crypto entities is unlikely to end just because there are new regulators with new policies. It will take a broad overhaul of AML/BSA rules for banks to be comfortable that tokens were not at some point tied to illicit activity,” the analysts wrote in the report, adding that this will require congressional action.