FDIC Asks Financial Institutions to Pause Cryptocurrency Activities

The Federal Deposit Insurance Corporation (FDIC) has requested financial institutions to suspend cryptocurrency-related activity, according to heavily redacted letters acquired in a lawsuit filed by Coinbase.

Coinbase, with the help of the consulting firm History Associates Inc., initiated the lawsuit against the FDIC in June, claiming the agency aims to sever ties between the crypto industry and the banking sector. The lawsuit also sought access to the FDIC's "pause letters."

One letter dated March 2022 stated, "… at this time the FDIC has not yet determined what, if any, regulatory filings will be necessary for a bank to engage in this type of activity. As a result, we respectfully ask that you pause all crypto asset-related activity."

Background
CoinDesk was the first to report this news. In its lawsuit, Coinbase accused the FDIC of failing to comply with requests made under the Freedom of Information Act (FOIA) to obtain records from federal agencies. FOIA allows public requests for such records.

According to the 2023 report from the FDIC's Office of Inspector General, the agency issued "pause letters" between March 2022 and May 2023 to certain financial institutions, asking them not to broaden crypto-related activities and to provide additional information.

The FDIC also sought crypto-related documents from these institutions, including "cost-benefit analysis," disclosures, and marketing materials, as detailed in documents released recently.

Industry Concerns
Coinbase's Chief Legal Officer, Paul Grewal, commented that the letters indicate “Operation Chokepoint 2.0” is not merely a crypto conspiracy theory. This phrase refers to a campaign linking back to the U.S. Department of Justice's 2013 initiative, which aimed to restrict banking services for high-risk industries, such as payday lenders and firearm dealers.

During a recent congressional hearing, Rep. French Hill expressed concern about the trend of debanking in the crypto sector, asserting that law-abiding American businesses should access banking services without government interference. Grewal further urged the incoming administration to revise unfavorable crypto policies, particularly those motivated by politics, like Operation Chokepoint 2.0.

FDIC's Position
The FDIC did not respond to a request for comment. In an October 2023 report, the FDIC's Office of Inspector General indicated that the agency's actions might have introduced uncertainty into the crypto sector. The report mentioned that the FDIC's delayed feedback might lead to perceptions that it does not support financial institutions engaging in crypto-related activities.

The FDIC later noted in a 2024 Risk Review report that it and other agencies reaffirm that banking organizations are neither prohibited nor discouraged from providing banking services to any specific type of customer.

As for Coinbase's next steps, the exchange plans to seek a court ruling regarding access to the unredacted versions of the pause letters, as stated in a joint status report filed on Friday.

A source familiar with the situation remarked, "If you look through the documents, some of these are so redacted you think you're reading some secret CIA war plan. But in reality these are letters that a financial regulator is sending to financial institutions."