Recent actions by U.S. regulators have incited fear that a crypto crackdown is coming, yet details are still hard to come by.  

The regulatory actions have been piling up. In late January the crypto-specialist bank Custodia was denied membership to the Federal Reserve System. Last week, Binance, the largest crypto exchange in the world, suspended all U.S. dollar transfers. The Office of the Comptroller of the Currency, who regulates all national banks, has been communicating to members that crypto assets are “likely to be inconsistent with safe and sound banking practices.” The OCC said it had “significant safety and soundness concerns” related to digital assets. 

As well, the the U.S. Securities and Exchange Commission has focused its gaze on stablecoins and banking the crypto industry. On Tuesday, a congressional hearing titled “Crypto Crash: Why Financial System Safeguards are Needed for Digital Assets” was held.

Sherrod Brown, chair of the banking committee that held the hearing, didn’t mince words in his criticism of recent crypto failures.

“These crypto catastrophes have exposed what many of us already knew: digital assets – cryptocurrencies, stablecoins, and investment tokens – are speculative products run by reckless companies that put Americans’ hard-earned money at risk,” he said in his opening statement. “Not surprising from an industry that was created to skirt the rules.”

Read more: Global Crypto Regulation Roundup: February Starts With Governments Making Bold Moves

What remains unclear is if this is a coordinated administrative push between the Federal Reserve, its regional banks, other banking regulators and the White House, to clamp down on crypto. 

Ram Ahluwalia, who was formerly a senior vice president at Bank of America and co-founded Lumida, an investment advisor specializing in digital assets, doesn’t believe the government is attempting to kill crypto. 

“There’s a lack of policy framework that works with crypto,” he said in an interview. “Our capital laws are the envy of the world. Crypto, however, throws in a curveball. The principal agent promise is bedrock to American laws. Take a DAO, for example. Who is the principal and who is the agent? There are legitimate gray areas.” 

The concerns about the efforts to cut off banking access to crypto companies gained momentum last week after a series of viral tweets by Nic Carter – a founding partner at venture capital firm Castle Island Ventures. Other prominent voices on Twitter shared Carter’s concern, like Messari founder Ryan Selkis and crypto lawyer Jake Chervinsky. 

I don't want to alarm, but since the turn of the year, a new Operation Choke Point type operation began targeting the crypto space in the US. it is a well-coordinated effort to marginalize the industry and cut of its connectivity to the banking system - and it's working

— nic carter 🌠 (@nic__carter) February 7, 2023

The concern was bolstered by the SEC suing and settling charges against crypto-exchange Kraken for its program allowing users to stake digital assets to gain a return. Kraken agreed to pay $30 million in fines and end its staking program in the U.S. 

Still, Ahluwalia said the concern is overblown.

“I’ve been tracking regulator statements and I haven’t seen any signs of an active campaign against digital assets,” he said. “Last year’s executive policy was constructive and aimed at protecting consumers and investors. This was released before the FTX blow up, which has caused increased regulatory scrutiny. I believe US banking regulators want to limit the contagion of crypto into the banking system.”

While separate issues, the regulatory crackdown rumors and the Kraken case are intertwined, as a long-expressed complaint about the SEC surfaced again – that it’s unwilling to engage with the industry in an open process and would rather lay down its rules through a series of enforcement actions. 

Respected lawyer and Chief Policy Officer for the Blockchain Association Jake Chervinsky put it this way: “Typically, federal agency overreach comes in the form of ‘regulation by enforcement,’ where agencies state expansive new views of the law in federal complaints unchecked by the public.”

Ahluwalia believes it’s not a zero-sum game. “Crypto lacks trust. Banks are the most reputable institutions. Fiat ramps and trusted intermediaries are necessary. If capital markets were on-chain with real-time data, 2008 wouldn’t have happened. We can strengthen the entire financial system with transparency,” he said. 

In 2022, Ahluwalia penned recommendations with former SEC chairman Arthur Levitt. The pair suggest the SEC needs to take four actions; issue interpretative guidance, stablecoin regulation from Congress, develop a self-regulatory organization and create “safe harbors” to protect good actors from being swept up in mass regulation. 

“The devil is in the details,” Ahluwalia adds. 

What’s important is getting the balance right between innovation and consumer protections. The question remains, who should be responsible for determining America’s future financial system?