In a surprising development, documents released on Friday revealed that American banks, keen to offer services based on public blockchain networks, have been dissuaded by the Federal Deposit Insurance Corporation (FDIC). This revelation came to light through a collection of newly unredacted crypto-related correspondences between the FDIC and its member banks.
The documents were procured by San Francisco-based cryptocurrency exchange Coinbase, with the help of the Freedom of Information Act, or FOIA. Last month, Coinbase had managed to secure heavily redacted versions of 23 such letters, and following a court order, the contents of these letters, along with two new ones, were unveiled in their near entirety on Friday.
A letter of particular interest, dispatched in March 2022 from the FDIC’s New York branch to a member bank, provided insights into the federal agency’s concerns. The FDIC had learned that this member bank was planning to introduce a “Bank Digital Deposit” program designed to operate on a public blockchain. While the name of the public blockchain remains confidential, the FDIC’s disapproval of the bank’s choice to use a public blockchain over a private, permissioned network was clearly articulated.
Public blockchain networks such as Ethereum and Solana, known for their decentralization and permissionless features, offer complete transparency and cannot be controlled by third-party administrators. On the other hand, private blockchain networks, often employed by nation-states to issue central bank digital currencies, impose restrictions on their usage.
The FDIC’s apprehension towards member banks launching products on unrestricted, fully transparent networks was evident in the letters. The regulator directed the New York bank to undergo a thorough review process before launching any products on public blockchains.
Other letters unveiled on Friday showed the FDIC instructing member banks to suspend the implementation of services related to Bitcoin trading. Last month’s unredacted sections of the same letters revealed the FDIC’s directive to member banks to “pause all crypto asset-related activity.”
Coinbase’s Chief Legal Officer, Paul Grewal, perceived Friday’s revelations as additional evidence of the alleged Biden administration’s initiative against the crypto industry through banking regulations, a strategy termed as “Operation Chokepoint 2.0.” This term borrows from the Obama-era scheme that targeted firearms dealers and payday lenders.
In his statement on X (formerly Twitter), Grewal stated, “They show a coordinated effort to stop a wide variety of crypto activity,” referring to the FDIC letters released on Friday.
This development underscores the ongoing tension between the burgeoning cryptocurrency industry and traditional banking regulators, hinting at the challenges that lie ahead in striking a balance between financial innovation and regulatory compliance.
