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Avanti Financial Faces Fintech Crackdown While JP Morgan Escapes Scrutiny?

Last Updated May 13, 2024 5:12 PM
Shraddha Sharma
Last Updated May 13, 2024 5:12 PM

Key Takeaways

  • The Federal Reserve offer sparticular scrutiny of fintech and BaaS activities in smaller banks.
  • CEO of Avanti Financial argues that larger banks may not face the same level of oversight.
  • Targeted Regulation comparison is being drawn to the controversial ‘Operation Choke Point’ regime.

Caitlin Long, CEO of Avanti Financial Group, has voiced concerns over the Federal Reserve’s focused supervisory practices on fintech and Banking-as-a-Service (BaaS) activities within smaller banks. 

She points out that similar scrutiny is not applied to larger banks, potentially leading to an unequal regulatory playfield.  The digital asset community often calls out “Operation Choke Point 2.0” for stifling innovation and disadvantaging a specific sector.

Fed Targeting the Crypto Sector?

Caitlin Long has noticed a targeted regulatory focus on fintech and Banking-as-a-Service (BaaS) activities within community and regional banks (CBOs/RBOs). She believes that large banks escape this scrutiny, which could be potentially unfair or discriminatory. 

Caitlin Long is the founder and CEO of Avanti Financial Group, a bank based in Wyoming that functions both as a traditional bank and a digital asset custodian  for tokens and other digital assets.

Long’s commentary suggests that the list of supervisory priorities includes monitoring fintech and BaaS activities specifically within smaller banks like Avanti Financial. Similar Federal Reserve’s scrutiny may not explicitly extend to larger banks like Wells Fargo and JP Morgan. 

The bank executive likens the situation to “Operation Choke Point,” a controversial initiative where the federal government under Obama was accused of targeting specific businesses. For instance, payday lenders and firearms dealers were reportedly cut off by pressuring banks to remove their access to banking services, effectively “choking” them out of the market.

By not imposing the same supervisory priorities on larger banks, Long argues that the regulation could unevenly impact smaller institutions, potentially stifling innovation and competition in the financial sector. In turn, it could make it harder for smaller entities to engage in or offer fintech and BaaS solutions. 

Long interprets it might create an uneven playing field where larger banks may continue their operations without the same level of scrutiny. Other X users have also pointed out that large banks like Wells Fargo might have targeted crypto-affiliated bank clients.

Fed Report Says ‘Monitoring Crypto Trends’

Meanwhile, the Federal Reserve’s May 2024 Supervision and Regulation Report has  outlined the current state of the US banking system. The report notes its resilience and the ongoing supervisory and regulatory measures to ensure its stability. 

It finds that the banking system is maintaining capital and liquidity levels above regulatory requirements. Despite some increases in loan delinquencies in sectors like commercial real estate and consumer loans, overall asset quality is sound.

It details recent regulatory changes and ongoing supervisory practices aimed at ensuring the safety and soundness of financial institutions. This includes a focus on managing credit, interest rate, and liquidity risks.

Supervisory Findings by Fed Report
Supervisory Findings by Fed Report

The report specifically states, “Program staff are also monitoring trends in novel activities at banks, the broader crypto-asset and fintech market, and other novel material developments in this space.”

The report states that the Federal Reserve is actively monitoring these risks and adjusting its supervisory strategies to address them effectively.

Fintech Industry In Focus

Long highlighted her surprise and concern over the Federal Reserve’s specific targeting of the fintech industry as a “supervisory priority.” 

She notes that it is unusual for the Fed to single out an entire industry in this manner, as there are no similar precedents in older Fed reports. Long points out that this focus on fintech started under the Biden administration, referencing the initial listing of fintech as a supervisory priority in November 2022. 

She also connects this increased scrutiny with negative outcomes for the industry, such as the layoffs that have occurred in the fintech sector. She suggests that the Fed’s actions might be having real-world impacts on employment within the industry. 

In 2023, Long cited a report that stated that factors like regulatory pressures, rising interest rates, and consumer financial stress led to layoffs across the sector.

American Banker notes  that fintech companies drastically reduced expenses as their revenue streams and funding slowed. Firms impacted by the chaos were names like LendingClub, Upstart, and SoFi.

Is it Operation Choke Point 2.0?

Caitlin Long’s observations raise significant concerns about the fairness and impact of the Federal Reserve’s regulatory approach towards smaller banks involved in fintech and BaaS. 

Similar concerns were raised earlier by the digital asset community. And if the larger banking ecosystem remains resilient and well-regulated as noted in the Federal Reserve’s May 2024 report, the stringent focus on smaller institutions could hamper their ability to innovate. 

The influence of the regulator remains a subject of discussion. At the moment, it seems unlikely that the Federal Reserve will need to adjust its regulatory approaches in response to these arguments. 

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