By Patti Murphy
It may be Spring in most parts of the United States, but in the world of cryptocurrency it's a cold winter. Cryptocurrency has come under attack on many fronts, with plummeting values, corporate and bank failures, and threats of legislative and regulatory actions.
Yet, according to a survey by financial technology firm Paxos, three-quarters (75 percent) of consumers remain confident about the future of crypto. In fact, among the 5,000 adult Americans surveyed on behalf of Paxos in January 2023, 72 percent said they had little or no concern about the volatility experienced in crypto markets over the past year.
"Despite fears that the rocky end to 2022 would have a chilling effect on consumer crypto adoption, the research shows that consumers are looking for more integration of crypto into their financial lives, not less," said Mike Cocetta, head of revenue at Paxos.
The Paxos survey contrasts markedly with consumer research conducted in March 2023 by the Pew Research Center, a nonpartisan think tank. Pew's researchers found that among adult Americans who have heard of cryptocurrency, 75 percent are not confident in its safety and reliability.
One reason for the variation in opinions may be the relatively small number of Americans who dabble in crypto. Just 17 percent of those surveyed by Pew said they had ever invested in, traded or used cryptocurrency, which is mostly unchanged from 2021 and 2022, the researchers said. Regulatory wake-up call, or Choke Point 2.0? Regulators have been forced to act, in part because of the failures of crypto exchange FTX and three banks that had strong ties to crypto: Silvergate Bank, Silicon Valley Bank and Signature Bank.
"We want to make sure there are safeguards in place," Rohit Chopra, director of the Consumer Financial Protection Bureau, said in an April 3 interview with Yahoo Finance. Chopra is a member of the Financial Stability Oversight Council, created by the Dodd-Frank Act to identify risks to economic stability posed by financial services firms. It's up to the FSOC's 11 voting members (all financial regulators) to come up with ways to put safeguards in place so that a meltdown akin to the financial crisis of 2008 doesn't happen.
"It [crypto] has gotten big enough to garner attention," said Larry Pruss, managing director, strategic resource management, at consulting firm SRM. But, he added, "I worry we're going to over-regulate this."
"It's hard not to perceive what's going on as effectively anti-crypto," said industry attorney Atlas. "Its' sad, really." Three of the closed banks were "supporting very innovative payments businesses. It wasn't crypto businesses that brought down those banks. It was how those banks were run," Atlas said.
"The shutting down of these banks that had direct pipelines into the crypto world has halted every other banks' forays into crypto," said James Huber, an attorney and partner at Global Legal Law Firm. Huber and others characterize the current regulatory stance on crypto as Choke Point 2.0, referencing previous efforts by regulators to curtail banking relationships.
Operation Choke Point was a federal government program that ran between 2011 and 2014. Its intent was to choke off access to the banking system by certain types of businesses. In all, bank regulators listed 30 merchant categories that regulators decided were off limits to banks, and by extension, merchant acquirers. These included gun shops, pawn shops, payday lenders and porn websites.
The program was eventually challenged in court, led by lawyers from the Washington, D.C. law firm Cooper & Kirk. Now those lawyers are taking on regulators again. "Businesses in the cryptocurrency marketplace are losing their bank accounts, or their access to the ACH network, suddenly, and with no explanation from their bankers," the firm wrote in a recent opinion paper.
Add to that the FDIC's shuttering of three banks serving the crypto market, one of which (Signature) was actually solvent—and doing so at great cost (that is, covering billions of dollars in deposits that didn't qualify for deposit insurance)—and a pattern emerges, the lawyers suggested.
"Past performance may not always be indicative of future results, but what the federal bank regulators have tried to get away with in the past is, it would seem, highly similar to what they are trying to get away with today," Cooper & Kirk wrote.
And as it did with Operation Choke Point, Cooper & Kirk argued that "Operation Choke Point 2.0" is unconstitutional. "The persistent unwillingness of the nation's bank regulators to follow the law and obey the Constitution calls out for congressional action," the lawyers insisted.
Sam Bankman-Fried, FTX's CEO, "showed us that when money is not regulated, terrible things happen," said Vijay Sondhi, CEO at NMI. "What we've seen with FTX is that there's a need for regulation, and there needs to be oversight, with risk management reporting to boards, not to CEOs."
Eric Brown, CEO at CryptoBucks and chairman of the ETA's crypto and blockchain committee, said the biggest challenge to the crypto marketplace, at least in the United States, is the lack of established rules and regulations. "Not having a regulatory framework is really tough," he said.
CryptoBucks, a unit of south Florida-based Alliant Payments, developed a payment app that supports credit, debit and crypto payments that showed promise early on, especially when it signed an acceptance deal with the Miami Dolphins football team in 2019. But regulatory uncertainty in the United States led CyberBucks to look to other markets.
"There are tons of opportunities out there," Brown said, adding that the company has been licensed already by the European Union, and markets in Africa, South America and Asia also look promising. "We plan to battle-test the product in emerging markets," Brown said. Then once regulators get their acts together in the United States CryptoBucks will move back onshore, he predicted.
Pruss isn't surprised. "When it comes to innovation in the payments industry, the U.S. always seems to be the last to adopt," he said, citing the protracted migration to EMV chip security in the United States for credit and debit cards. "But it's coming," Pruss insisted.
Sondhi is skeptical that there's a place for crypto at the retail POS. "It's really not practical," he said. "Besides, consumer payments work really well in the U.S."
That has not kept Mastercard and Visa from dabbling in crypto. Each has initiatives underway involving stablecoins, which are cryptocurrencies pegged to stable assets, like the U.S. dollar. Both also support crypto-linked credit and debit cards, which convert crypto into fiat currency at the point of payment.
"We continue to partner with crypto companies that improve fiat on and off ramps as well as progress on our product roadmap to build new products that can facilitate stablecoin payments in a secure, compliant and convenient way," Cuy Sheffield, vice president and head of crypto at Visa, blogged in early March. "Despite the challenges and uncertainty in the crypto ecosystem, our view has not changed that fiat backed digital currencies running on public blockchains have the potential to play an important role in the payments ecosystem."
A few days later, in a press release announcing a crypto-linked debit card for Lithuania, Sheffield said Visa wants to be "a bridge between the crypto ecosystem and our global network of merchants and financial institutions."
Chris Aliotta, CEO at Quantalytix, a Birmingham company that developed a cloud platform community banks use for risk and loan management, explained how the forces leading to recent crypto network and bank failures, "were less about crypto and more about interest rates." The former banker continued, "What we're seeing is that when money is cheap and plentiful, people are more inclined to invest in speculative assets like crypto."
As the Federal Reserve raised interest rates beginning in March 2022, the yields on government debt rose, which caused the market value of previously issued debt (Treasury bills and corporate bonds) to plunge, several economists have explained. For example, a 2 percentage point gain in the yield on a 30-year bond can cause its market value to plunge by as much as 32 percent.
That problem was exacerbated when executives at technology companies began withdrawing their cash in response to layoffs. The withdrawals couldn't be met by existing cash reserves, so, for example, SVB was forced to sell a large portion of its securities portfolio at a loss of about $1.8 billion, the news of which prompted a customer run on the bank.
Aliotta stated that regulators should have been more closely monitoring banks for interest rate risk. "This was a very selfish risk created by one or two banks," he said.
Paul Kupiec, senior fellow at the American Enterprise Institute, offered a similar assessment in an opinion piece published by The Hill. "Both [SVB] and Signature Bank grew like crazy in the past few years. According to an FDIC discussion of its early warning models, the first sign of a problem bank is often rapid growth funded by a volatile lending source, like uninsured deposits. Other signs include a concentration in bank business or loan categories and growth fueled by a new activity," Kupiec wrote, adding that the description "of a potentially troublesome bank fit both SVB and Signature Bank to a 't' and yet none of the regulators seemed to pay any attention to either bank."
To add irony to the situation, SVB's CEO was a director of the San Francisco Fed, and former Congressman Barney Frank, co-author of the Dodd-Frank Act, was a director of Signature Bank. "Apparently, knowledge of basic banking skills was not the talent that landed either of them in the boardroom," Kupiec quipped.
One regulatory agency that has been focusing on the crypto market is the Security and Exchange Commission. It has filed charges against about a dozen celebrities for touting crypto assets in violation of securities laws. "Nothing about the crypto markets is incompatible with securities laws," SEC Chairman Gary Gensler said in a September 2022 speech. "Investor protection is just as relevant, regardless of underlying technologies."
Last year, the SEC nearly doubled the number of experts assigned to its crypto assets and cyber unit. The infusion of lawyers, investigators and fraud experts is in keeping with recommendations put forth in "The Administration's Roadmap to Mitigate Cryptocurrencies' Risks," published Jan. 27, 2023, on www.whitehouse.gov.
"But the events of the past year underscore that more is needed," the White House stated in that document, adding that more needs to be done to thwart crypto fraud and efforts to use crypto for money laundering. The FBI reported that Americans were taken for $2.57 billion in online crypto scams last year. The crypto exchange FTX stated in March 2023 that it had identified $8.9 billion in customer funds that have gone missing.
The Administration also pushed for congressional action. It offered a laundry list of legislative steps Congress could take—steps to increase transparency and disclosure, stepped up enforcement and addressing stablecoin risks.
In an October 2022 paper, the FSOC warned that some backers of stablecoins are playing fast and loose with the truth, for example, by suggesting the assets are backed by FDIC insurance when they are not. Chopra addressed the stablecoin issue with Yahoo Finance. "Right now stablecoins are not ready for consumer payments," he said, noting that crypto lacks the scale of options like credit and debit cards.
"It's kind of a fool's errand to bring crypto to the point of sale," Sondhi said. 
Patti Murphy is senior editor at The Green Sheet and self-described payments maven of the fourth estate. She also co-hosts the Merchant Sales Podcast.
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