Attitudes about cryptocurrencies have evolved exponentially in recent years, and recent legislative and policy moves under the Trump administration could lead to a dramatic sea change in the financial marketplace, including the real estate finance sector.
Banks have historically taken steps to avoid direct crypto trading activities to limit their risk exposures. However, many banks offer services to firms dealing with digital assets, such as payment rails, deposit accounts and custodial services.
Financial services professionals have recognized the potential benefits afforded by digital assets, such as facilitating faster payment clearing times, particularly with respect to cross-border payments.
Bipartisan congressional support for the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act and the Digital Asset Market Clarity (CLARITY) Act has signaled a willingness from lawmakers to implement legal frameworks to allow cryptocurrencies to become a standardized part of the financial ecosystem in the United States.
Likewise, federal agencies have also taken steps to accommodate digital assets in various corners of the financial system, perhaps most notably represented by new rules and policy statements from the Federal Reserve, the Federal Deposit Insurance Corp. (FDIC), the Office of the Comptroller of the Currency (OCC) and the Federal Housing Finance Agency (FHFA).
Some large banks and nonbank financial institutions, such as fintechs, have already begun holding digital assets in their portfolios. Meanwhile, other entities, many of which have limited resources to allocate toward beefing up safeguards to account for security and volatility concerns associated with crypto holdings, remain cautious about the subject.
A brief history of crypto
Attitudes toward digital currencies have evolved since the launch of Bitcoin in 2009. Financial services professionals, regulators and the general public have gained significantly more awareness around the subject, but acceptance of fully digital tokens as legitimate forms of currency has been slow to catch on.
Skepticism about crypto’s legitimacy is understandable given its susceptibility to fraudulent activity. Scammers tend to value digital assets because they offer anonymity. This is a useful feature when committing ransomware attacks, in which they will typically demand companies to transfer large sums of money to them via cryptocurrency to regain access to vital data systems they have hacked and encrypted.
The U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has issued countless reports providing insight into Bank Secrecy Act/Anti-Money Laundering (BSA/AML) trends related to crypto, including attempts by foreign actors to infiltrate U.S. companies and financial markets.
Meanwhile, the Securities and Exchange Commission (SEC) has grappled with the question of whether cryptocurrencies would be more accurately classified as commodities or securities, given their price volatility and the tendency for digital asset holders to treat them as an investment opportunity rather than currency.
This inherent volatility also frequently leads to major losses for crypto holders, as digital asset values have been known to drop dramatically in a short period of time and often with little warning. With this in mind, banks have acknowledged the need to address liquidity and financial stability concerns associated with holding large amounts of crypto on their books for depositors.
The new crypto perspective
Under the Trump administration, the SEC, FHFA, FinCEN and the federal banking agencies have replaced many policy guidance materials on crypto – among other regulatory priorities – with new policy statements and directives emphasizing the potential benefits of embracing digital assets in the modern, digitally-focused financial world.
In March, the OCC withdrew its participation in a 2023 joint statement on key risks associated with digital assets, including volatility and vulnerabilities, and describing the agencies’ cautious approach to crypto-asset-related activities and exposures at banking organizations. The Fed and the FDIC withdrew their participation in April.
The OCC issued Interpretive Letter 1184 in May, clarifying that national banks may provide crypto-asset custody and related services as long as they do so in a safe and sound manner and comply with applicable laws and regulations. In July, all three banking agencies issued a joint statement that could be key to bringing digital assets into the mainstream banking ecosystem.
Despite liquidity concerns, some champions of digital assets have argued that allowing borrowers to use unconverted cryptocurrencies as reserve assets when applying for a mortgage could open up homeownership opportunities to many younger consumers.
In June, one month after the introduction of the CLARITY Act, FHFA Director Bill Pulte issued a directive to Fannie Mae and Freddie Mac ordering the government-sponsored enterprises to consider allowing unconverted crypto to be counted as reserve assets when conducting single-family mortgage loan risk assessments.
The Mortgage Bankers Association (MBA) expressed optimism regarding the potential impact of these policy developments in the following statement provided in response to a request for comment by Dodd Frank Update:
“MBA welcomes what should be a collective industry effort to modernize the mortgage underwriting process. Crypto as a reserve asset is one option, and there many other impactful approaches to rethinking the underwriting of mortgage risk that should be included in the effort. FHFA’s New Products and Activities Rule (finalized in December 2022) should serve as a starting point for determining the need for public input to assess all operational, regulatory and market risks and impacts, which must be considered before any changes are implemented. We will seek to work with the FHFA and Fannie Mae and Freddie Mac on this matter.”
In July, SEC Chair Paul Atkins indicated his agency’s plan to tackle the classification question that has hung over digital assets by launching “Project Crypto.” Atkins directed SEC staff to establish a regulatory framework for determining whether a digital asset should be classified as a commodity or a security while also supporting the tokenization of traditional assets, as well as the operation of multi-functional crypto platforms.
This series of events has opened the financial services industry to a new host of potential opportunities and challenges whose significance cannot be underestimated as we explore them further in this report.
Enjoy more features included in the Intersection of Banking and Crypto Regulation report by clicking here.