The Federal Reserve has announced an enforcement action against Farmington State Bank, a Washington-based institution tied to the collapsed cryptocurrency exchange FTX.

The Fed says Farmington improperly changed its business model in 2022 to pursue digital asset activities without proper approval. This led to the bank receiving around $11.5 million from FTX's sister company Alameda Research.

Now Farmington is required to wind down operations in an orderly manner under the Fed's enforcement action. The move represents the latest crackdown on crypto-linked banks in the wake of FTX's failure.

Bank Received Funds From FTX-Affiliated Firm

According to the Federal Reserve, Farmington State Bank did not properly notify or receive consent from regulators when it shifted its focus to "digital banking services" in 2022.

This pivot included plans to facilitate stablecoin issuance and partner with blockchain firms. It ultimately led to Farmington receiving close to $12 million from Alameda Research, which the Fed likely saw as a concerning exposure.

Farmington had previously operated as Moonstone Bank before a rebrand. The name change and model pivot raise questions about whether it aimed to benefit from links to FTX prior to the exchange's collapse.

Federal Regulators Continue Crypto Bank Crackdowns

The Fed's action against Farmington is part of a wider intervention by US authorities into banks with significant crypto exposure:

• The FDIC shut down crypto-friendly Signature Bank in December 2022 due to liquidity issues.
• Silvergate Bank saw massive withdrawals and its parent company announced plans to "wind down" the crypto bank's operations.
• Silicon Valley Bank failed in November 2022 amid concerns over its crypto business dealings.

Lawmakers conducted multiple hearings following the failures, questioning whether crypto ties contributed to the banks' downfalls. The enforcement on Farmington represents authorities' continued skepticism of crypto-linked banking models.

Winding Down Crypto Banking Operations

As part of the enforcement action, Farmington cannot engage in digital asset activities or make major business decisions without Fed approval.

The bank had already announced plans to exit crypto services in January 2022 to refocus on community banking. The Fed order ensures this wind-down happens in an orderly manner without putting deposits at risk.

Farmington also planned to sell its deposits and loans to Bank of Eastern Oregon prior to the enforcement action. It's unclear whether the Fed's intervention will impact Farmington's wider restructuring efforts.

Are Stricter Crypto Banking Regulations Needed?

The collapses of crypto-tied banks like Silvergate raise questions about whether tighter oversight specifically for digital asset dealings may be warranted. What regulations could prevent excessive risk while still allowing innovation?

Can Traditional Banking Be Reconciled With Crypto?

From liquidity risks to compliance gaps, there seem inherent tensions between the philosophies of crypto and banking. Is meaningful integration between the two sectors ultimately feasible?

Conclusion

The Federal Reserve's crackdown on Farmington State Bank demonstrates authorities are unwilling to tolerate excessive crypto risk-taking by traditional banks. As regulators wind down Farmington's digital asset activities, larger questions remain about whether the freewheeling nature of crypto can ever be safely integrated into the highly regulated world of banking. While oversight aims to protect consumers, finding the right approach will be crucial to balance innovation and stability.