In summary
- The US Federal Reserve (FED) has issued a cease and desist order to United Texas Bank, citing deficiencies in its risk management systems with Cryptocurrency clients.
- The order, dated September 4, 2024, followed an inspection in May that revealed problems with the bank’s corporate governance structure.
- The Fed identified “significant deficiencies” in the bank’s practices related to foreign correspondent banking and virtual currency customers.
The US Federal Reserve (FED) has issued a cease and desist order to United Texas Bank, citing deficiencies in the bank’s risk management systems, particularly in its dealings with cryptocurrency clients.
The order, dated Sept. 4, 2024, follows a May inspection by the Fed of United Texas Bank. The inspection revealed problems within the bank’s corporate governance structure and identified oversights by the board of directors and senior management.
The Fed identified “significant deficiencies” centered on the bank’s practices related to foreign correspondent banking and virtual currency clients. The report specifically noted deficiencies in risk management and compliance with anti-money laundering (AML) and Bank Secrecy Act (BSA) measures.
The order did not provide specific details on how the bank violated regulations related to its cryptocurrency clients.
In response to the findings, United Texas Bank has taken steps to strengthen its compliance with BSA and AML requirements. Under the order, the bank’s board of directors has agreed to submit a plan to enhance the board’s oversight of BSA/AML compliance.
Crypto compliance firm AMLBot’s head of legal, Niko Demchuk, told Decrypt that the cease and desist order has consequences that go beyond the receiving party and its customers. He explained that “every cease and desist order plays a significant role in the market.”
“Other banks will try to obtain more information and details on where exactly the current AML regulations were not met in order to improve their own internal AML processes,” Demchuk said, adding that, “The mention of crypto assets will alert other banks working with cryptocurrencies to review their risk management systems, ensuring that all risks are considered and mitigated.”
Demchuk does not believe that crypto banking itself is in danger, stating that “if a bank has robust LMA processes in place, it should not worry.” He added that “the cryptocurrency market is currently very lucrative, and every bank is exploring ways to start working with cryptocurrencies.”
Regulatory scrutiny of crypto-friendly banks
According to its most recent quarterly report, United Texas Bank has 75 employees and approximately $1 billion in assets under management. This enforcement action is part of a broader trend of regulatory scrutiny of banks involved in cryptocurrency-related activities.
In early August, the Federal Reserve took a similar action against Customers Bancorp and its Pennsylvania-based subsidiary, Customers Bank, identifying deficiencies in risk management systems and LMA practices. These regulatory actions have sparked discussions within the cryptocurrency community about the relationship between traditional banking and the cryptocurrency industry.
Some industry advocates, including Dan Spuller of the Blockchain Association, have characterized these actions as “Operation Chokepoint 2.0,” suggesting a coordinated effort by U.S. President Joe Biden’s administration to restrict banking services to the cryptocurrency industry. The Bank for International Settlements (BIS) also issued a warning about the risks banks face from permissionless blockchains in late August.
These actions follow recent statements made by Charles Hoskinson, creator of Cardano (ADA) and co-founder of Ethereum (ETH), who suggested that the Biden administration was deliberately trying to kill the cryptocurrency industry. Back then, fellow Ethereum co-founder Joe Lubin told Decrypt that “there could be some entity, possibly related to the banking lobby,” behind an alleged US war on crypto.
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