Everything’s bigger in Texas — even its love for crypto. The state has been actively courting the crypto industry for years now, with Governor Greg Abbott tweeting a few years back, “soon we will be #1 for blockchain and cryptocurrency.” The state’s pro-crypto stance has since attracted several major players, including Bitcoin miner Core Scientific, Bitmain, Blockcap, Argo Blockchain, and others, which have expanded their operations into Texas. Thus, in a state reputed for its crypto-friendly stance, the U.S. Federal Reserve’s recent actions against Texas-based banks are raising eyebrows.
A recent cease-and-desist order against the United Texas Bank has sparked concerns about how federal regulators are handling financial institutions serving the crypto industry. Texas, which has proudly positioned itself as a hub for digital assets, now faces the challenge of balancing innovation with increasing federal scrutiny.
On September 4, the Fed ordered United Texas Bank to halt certain crypto-related activities, citing “significant deficiencies” in the bank’s compliance with anti-money laundering (AML) and Bank Secrecy Act (BSA) regulations. In plain terms, the Fed is worried the bank isn’t keeping a close enough eye on its crypto dealings, potentially opening the door for money laundering. According to the Fed, the bank’s risk management gaps and oversight of foreign correspondent banking activities were key reasons for the clampdown.
The Fed outlined that, “The Examination identified significant deficiencies related to foreign correspondent banking and virtual currency customers, specifically risk management and compliance with applicable laws, rules, and regulations relating to anti-money laundering including the Bank Secrecy Act.”
This isn’t the first instance of federal regulators cracking down on crypto-friendly banks. On August 8, 2023, Customers Bancorp, a Pennsylvania-based institution with ties to the crypto sector, was hit with a similar order. These actions are being seen as part of “Operation Chokepoint 2.0,” an alleged campaign targeting industries deemed risky, including the growing cryptocurrency market.
What’s at Stake for Texas’ Crypto Adoption?
Texas has become a hub for blockchain companies and digital asset innovations. Austin and other major cities have welcomed crypto firms with open arms, offering supportive regulations, energy resources, and an enthusiastic community. The Blockchain Council recently hinted at projections suggesting that the blockchain devices market will hit $15.69 billion by 2031, an increase from $621.83 million in 2022, supported by a compound annual growth rate (CAGR) of 43.15%.
However, federal oversight could slow this progress. While the cease-and-desist order issued to the United Texas Bank could send the wrong message to other banks in the region that serve the crypto industry, some worry that these actions could create uncertainty for banks and financial institutions that are willing to toll the same line. The broader question remains: can Texas maintain its pro-crypto stance under increasing federal scrutiny?
The crypto sector in Texas has seen huge growth, with some estimates suggesting the state is responsible for about 50% of all Bitcoin mining operations in the United States. This is because the state has friendly regulations and support from the local energy provider, ERCOT. These figures make Texas a key participant in the crypto space, but the regulatory landscape could challenge this. Some experts believe that banks may become reluctant to serve crypto clients, fearing potential legal and regulatory repercussions.
Dan Spuller, Director of Industry Affairs at the Blockchain Association, voiced concerns about the impact of the federal government’s actions on crypto innovation, describing the order as part of “Operation Chokepoint 2.0,” a perceived effort by the government to stifle the crypto industry. His remarks reflect a growing frustration within the industry over what some see as heavy-handed tactics by federal agencies.
A report by a blockchain data platform, Chainalysis, suggests that the regulatory clampdown could have a chilling effect on crypto adoption, especially in states like Texas, where local governments have been supportive of the technology. “Without access to banking, crypto firms can’t grow,” the report noted. Their 2023 report also pointed out that while states like Texas have supported growth, banking access remains one of the major barriers for crypto firms.
The Future of Crypto Banks in Texas
So, what does the future hold for crypto banking in Texas?
While the state government remains bullish on digital assets, the path forward could be rocky. Analysts predict that if more banks come under federal scrutiny, others might shy away from working with crypto companies altogether. This could slow the sector’s growth and make it harder for new businesses to access essential financial services.
However, other experts argue that Texas’ commitment to crypto won’t waver. With the backing of key players such as Governor Greg Abbott and Senator Ted Cruz in support of the industry, plus supportive state legislation and significant energy resources for mining operations, Texas could continue attracting blockchain companies, even in the face of federal pressure.
According to various reports, including those from Deloitte, Texas is considered one of the top crypto-friendly states. Texas, along with Wyoming, Arizona, and Florida, has implemented favorable regulations and policies that support cryptocurrency businesses and activities. For instance, in 2021, the Texas Department of Banking gave state-chartered banks permission to hold and protect cryptocurrencies for their customers, paving the way for greater adoption and innovation in the crypto space.
For now, the challenge will be finding the right balance between state-level innovation and federal regulation.
Texas may push for more autonomy in regulating its crypto industry, while the federal government may tighten its grip. The outcome of this tug-of-war will notably impact the future of cryptocurrency in the United States.
Notwithstanding, while Texas is determined to lead the charge in crypto adoption, banks and other financial institutions will need to tread carefully to avoid falling afoul of federal mandates.
Author: Ayanfe Fakunle
The editorial team at #DisruptionBanking has taken all precautions to ensure that no persons or organisations have been adversely affected or offered any sort of financial advice in this article. This article is most definitely not financial advice.
