Going back to an executive order made by then President Biden in early 2022, there has been a push to figure out how digital assets can be used within the US financial system and how that can be done safely. This is coming closer to fruition in the second Trump administration as the Digital Market Clarity Act is moving through congressional committees and in the House of Representatives and has been referred to the Senate as well. There are currently four versions according to The Congress.gov website. What will be the advantages of allowing the deposit of digital assets in regulated US banks and what will be the pitfalls both for the economy in general and for you in particular?
Will You Have Separate Accounts for US Dollars and Your Crypto Deposits?
Money that originates in and stays in the crypto world only needs to be denominated in dollars or other national currencies if it is going to be converted into one of those currencies. To the extent that one deposits Bitcoin, Ethereum, or any cryptocurrency in a bank account and it is held separately from dollars, those assets might as well have remained with a crypto exchange or simply in your own crypto wallet. There are tangible benefits to having a bank account. Will such benefits like easy access to funds, insurance of deposits by the FDIC up to $250,000 per account, protection from losses in electronic transfers due to fraud, and help in financial planning be equally available for those with just crypto accounts?
How Will The FDIC Cover Losses from Crypto Accounts?
After the 1929 stock market crash and into the depths of the Great Depression about nine thousand banks failed. Congress then created the Federal Deposit Insurance Corporation or FDIC. Its task over the years has been to regulate banks to help avoid failures and to insure deposits in the event of bank failure. Every account by every depositor of every insured bank is protected up to a quarter of a million dollars. For this system to work banks need to maintain sufficient reserves and do business in ways that will help avoid failures. A serious issue if banks start to comingle crypto and dollar deposits is that a bank could fail due to another crypto winter even when its dollar assets would have sound. We should expect that whatever form the final version of the Digital Market Clarity Act takes financial institutions that do business with crypto as well as dollars will need to maintain sufficient reserves and safeguards so that a crypto crisis does not take down the US and other banking systems. It could well be that only dollar deposits will be covered by the FDIC and crypto deposits will be on their own! As noted in a report by JPMorgan Chase, while digital assets using distributed ledger technology have the promise of many advantages for the banking system, digital assets may not yet be ready for use in fully regulated banking environments.
FDIC Headquarters in Washington DC
Use of Distributive Ledger Technology in Banking
The JPMorgan paper goes on at some length about the benefits of the technology unpinning decentralized finance. As such it may well be that adoption of DLT will be the “foot in the door” that helps get cryptocurrencies into the banking system and forces Congress and regulators to come up with regulatory solutions that protect and serve the customers and the banking and crypto systems.
Banks Currently Taking Crypto Deposits
While Congress and regulators are still working the bugs out of the system there are banks today that take crypto deposits. These include Anchorage Digital Bank, N.A., Kraken Financial (Wyoming SPDI), Custodia Bank (Wyoming SPDI), BNY Mellon – Digital Assets, U.S. Bank – Institutional Crypto Custody (Global Fund Services), Sygnum Bank (Switzerland/Singapore), and AMINA Bank (formerly SEBA Bank) according to Atlos.