Is US Fed and SEC Centralizing Crypto Custody? ETF Issuers At Risk

The US Federal Reserve has been going after several crypto-friendly banks looking to offer crypto custody services to several market players. In another such crackdown, the US Fed issued a cease-and-desist order to Dallas-based United Texas Bank citing major “deficiencies” in following the anti-money laundering rules linked to the bank’s dealing with crypto firms.

US Fed Targeting Bank on Crypto Custody Offerings

The recent notice from the US Fed to the United Texas Bank doesn’t specify how it failed to comply with AML regulations while dealing with crypto firms. However, per the order, the bank’s leadership has consented to the notice in order to avoid formal proceedings.

The US Fed has given a 90-day period for the United Texas Bank to submit a comprehensive five-point action plan to meet the AML standards. This notice is the latest example of a crypto-friendly bank coming under scrutiny from U.S. regulatory authorities. Last month, Customers Bank faced similar regulatory attention from U.S. officials. Crypto industry players have started questioning these actions from the regulators.

ANOTHER CRYPTO BANK, ANOTHER ENFORCEMENT ACTION…https://t.co/skSeOAgZZi

— Caitlin Long 🔑⚡️🟠 (@CaitlinLong_) September 4, 2024

Gemini founder Tyler Winklevoss also noted: “When Harris said she wanted to “reset” with the crypto industry, we all assumed for the better. Turns out she meant for the worse”.

While the US Fed has been targeting several crypto custody solution providers, analysts have raised questions about why regulators, including the SEC, are discouraging federally regulated banks from offering custodial solutions. On the other hand, overseas regulators are supporting local banks. A day before, Swiss Bank ZKB announced its trading and crypto custody facility for BTC and ETH.

Crypto ETF Issuers Are At Risk

Amid strong demand for crypto ETFs in the US, hackers have been trying to target their custodial platforms. Recent reports also suggest North Korean hackers targeting Bitcoin ETFs.

ConsenSys lawyer Bill Hughes said: “Crypto ETF issuers better have their security as tight as possible. DPRK is at the door”. Rising further concerns regarding this matter, Fox Business journalist Eleanor Terret said that most of the crypto ETF issuers rely on a single crypto custody provider – Coinbase – for their BTC and ETH holdings.

Thus, Coinbase could be a potential “single point of failure” for the entire market, emphasizing that centralization of crypto custody can be fatal to the entire crypto ecosystem.

It doesn’t bode well that nearly all crypto ETF issuers have the same custodian for all their $BTC and $ETH. This makes @coinbase a potential single point of failure and that’s scary. https://t.co/47RNMQ5dQN

— Eleanor Terrett (@EleanorTerrett) September 4, 2024

Terret also slammed the SEC and US Fed for discouraging federally regulated banks from offering crypto custody services under SAB 121. She argued that such policies reduce the pool of crypto custodians leading to increased centralization and greater vulnerability in the market. Coinbase CLO was quick to respond to Terret’s doubts regarding having Coinbase the major custodian for all ETF issuers.

I think it's whatever the opposite of scary is. A wide range of the world’s largest and pickiest institutions trust us as the most effective way to keep their clients’ digital assets safe. https://t.co/lL1tEjPv1G https://t.co/jw0Tqgi7td

— paulgrewal.eth (@iampaulgrewal) September 4, 2024