Crypto-Friendly Bank Ordered by Fed to Limit Risks From Digital Asset Clients

As a seasoned crypto investor with years of experience navigating the tumultuous waters of digital assets, I have seen my fair share of regulatory actions and bank-crypto partnerships. The recent enforcement action against Customers Bank by the U.S. Federal Reserve is not entirely surprising, given the increasing scrutiny on banks handling cryptocurrency clients.

The US Federal Reserve has criticized Customers Bank, a financial institution that works with well-known cryptocurrency companies, for failing to effectively monitor illegal activities, especially within its digital asset clientele.

In a contract approved by high-ranking bank officials, the Federal Reserve highlighted substantial flaws in the bank’s risk management procedures and adherence to anti-money laundering regulations, laws, and guidelines.

The client roster of the bank under consideration has encompassed prominent entities like Galaxy Digital, Coinbase, and Circle. Amidst the tech-bank turmoil last year that led to the collapse of several banks catering to cryptocurrency clients, it has been challenging to locate a bank with such a supportive approach within the U.S. banking industry. However, signs of trouble in the bank’s crypto dealings had previously emerged. In June, CoinDesk disclosed that the bank was reducing hedge fund activities and limiting its cryptocurrency deposits.

The lender headquartered in Pennsylvania, owned by Customers Bancorp (CUBI), exclusively deals with U.S. dollars and does not entertain cryptocurrency transactions or issue loans for crypto-related activities. However, it provides a real-time, blockchain-based payment system called Customer Bank Instant Token (CBIT) to its numerous digital asset firm clients, enabling them to make 24/7 U.S. dollar payments. This service, specifically the CBIT platform, was brought up in the recent enforcement action.

A spokesman for the bank didn’t immediately respond to a request for comment.

Under the given directive, the bank is required to submit a sequence of detailed plans and a revised compliance strategy to the Federal Reserve. This includes an undertaking to securely gather, evaluate, and store complete, precise information for all customers. The bank should also inform the Fed 30 days ahead if it intends to embark on any new strategic venture, product launch, service provision, or partnership with external parties concerning its digital asset strategy.

The Fed noted that Customers “has begun to take measures to address the identified deficiencies.”

The regulatory bodies responsible for U.S. banking, such as the Federal Reserve, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corporation, have given previous instructions to banks aiming to minimize their involvement in the cryptocurrency market. Last year, the Federal Reserve announced plans to rethink its digital assets strategy by implementing a new “novel activities supervision program.” This program, staffed with experts, is designed to assist regular banking supervisors in monitoring the intersection between the crypto sector and the traditional banking system.