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In its cease and desist order to the Dallas based bank, the Federal Reserve highlighted significant deficiencies related to foreign correspondent banking and virtual currency customers, specifically risk management and compliance with anti-money laundering laws.

This action followed an examination by the Federal Reserve Bank of Dallas conducted on May 22, 2023. According to the Fed, the United Texas Bank has accepted this order and started taking measures to strengthen its AML compliance program. The board of directors of the Bank has agreed to submit a five-pronged action plan to Fed within 90 days of the issuance of the order. 

Source: US Federal Reserve

But, this is not the first instance of such regulatory scrutiny. On August 8, 2024, the Fed said it had identified significant deficiencies related to risk management strategies at the Pennsylvania-based Customers Bank and its compliance with AML regulatory laws.

Customers Bank was famous for being a ‘crypto-friendly bank’ following the collapse of Signature and Silvergate banks in March 2023, and it had managed several crypto hedge funds. Currently, the bank is developing a plan to address the Federal Reserve’s concerns over its risk management strategies and AML law compliance. 

Not surprisingly the crypto community has responded with criticism of the Fed’s actions. Supporters of Operation Choke Point argue that this is just another step in a coordinated effort by the Biden administration to separate the cryptocurrency industry from traditional banking services.

Caitlin Long, Founder/CEO at Custodia Bank, said on her X account that it’s just  “another Crypto bank and another enforcement action”. 

More of the same from the Biden administration says Custodia Bank’s Caitlin Long. Source X

The recent actions against crypto-friendly banks show that regulators are tightening their grip on the connection between banks and cryptocurrency, which is dampening enthusiasm for traditional banks to work with digital assets in the future. Howard Lutnick, CEO of Cantor Fitzgerald, posted on X that while traditional financial institutions are interested in embracing Bitcoin as a new asset class, they remain hindered by current U.S. regulatory requirements.

Lutnick characterized Bitcoin as a newcomer to the traditional finance (TradFi) space, only now starting to interact with the global financial system. He pointed out regulatory challenges, stating, “If a bank were to hold your Bitcoin, they would have to reserve an equal amount of their own capital, essentially ‘freezing’ those funds. This poses a significant barrier.” Lutnick indicated that, under a more accommodating regulatory environment, traditional financial firms would be eager to incorporate Bitcoin into their services.

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