Will Crypto Capital Find A Home In The U.S.?

Two recent scholarly articles, recent administrative law decisions, and the Report of the President's Working Group on Digital Assets ("PWG Report") may provide important clues for the potential future for the regulation of bank capital in the United States related to digital assets. Viewed as a whole, they may show a relationship between the Administration's agenda and principles closely aligned with the Administrative Procedure Act ("APA"), both of which are likely to have an impact on the development of capital standards for crypto in the United States.

In an article recently published in the Virginia Journal of International Law, entitled "Sovereignty and Legitimacy in International Banking Law" (hereinafter "Sovereignty and Legitimacy"), authors David Murphy and Kristina Parajon Skinner focus on standards governing the Basel Committee on Banking Supervision ("BCBS" or "the Basel Committee") regarding capital levels for large banking institutions. The article analyzes the intense U.S. scrutiny of the Basel Committee when promulgating the so-called "Basel 3 End Game" standards. Those standards, as proposed by the Federal Reserve Board, were strongly opposed by the U.S. banking industry and were later withdrawn with an indication that they would be re-proposed.

Murphy and Skinner focus on the Basel processes through which the "Basel 3 End Game" and other standards have been developed. The authors describe a framework with very little process or transparency that can be relied on and in which the participants are allowed a maximum degree of discretion with a minimum amount of accountability. For the most part, "BCBS" appears to be a process featuring a gathering of mostly European bureaucrats and politicians meeting behind closed doors and through intramural negotiation (much of which relates to political considerations) to come to agreements on standards. The relative looseness of this process may be seen as one of the causes of the weakness in supporting data for the proposal which attracted many American critics.

Murphy and Skinner describe several steps in the BCBS rulemaking process:

• Setting forth a policy agenda, much of which may be imposed externally by politicians.
• Formation of a "working group" in which BCBS members compete for influence.
• Gathering of evidence by the working group which may conduct hearings or invite written submissions but without a requirement for either. Hearings are typically "by invitation only" rather than open to the public.
• Conducting quantitative impact studies and issuance of a consultation paper, which often are beset by bad data quality.
• Finding consensus on a final rule. There are no formal standards for consideration of evidence or requirements for justification of policy proposals, and the proposed rule does not have to be accompanied by an analysis of various impacts of the proposed regulation.
• The proposed rule is passed up through a hierarchy of committees, which typically have neither the time nor resources to repeat the discussion conducted at the working group level, meaning that decisions are usually confined to the broad sweep of the proposed rule.
• Publication of the rule, which typically is not accompanied by a substantive justification nor an account of how it was calibrated, though there may be an impact analysis.
• No independent body with the authority to review transnational regulatory accords under required changes to which stakeholders can appeal; nor is there an independent body responsible for monitoring actual losses versus capital required across Basel members; nor is there an independent body responsible for collating unintended consequences of Basel rules and determining any necessary changes.

Thus, the BCBS appears to operate by consensus and negotiation followed by an opaque committee-based governance process which Murphy and Skinner describe as "dialogical, norm-generating, and incremental." Murphy and Skinner pointed out a series of problems with the legitimacy of Basel rulemaking under global administrative law and norms, which they define as:

• Legality and accountability under the law;
• Participation by affected stakeholders;
• Transparency and predictability of process;
• Rationality of decision-making based on evidence presented;
• Proportionality and protection of rights;
• Independent dispute resolution mechanisms; and
• A review mechanism.

Transnational policymaking by the Basel Committee clearly falls under the category of global administrative law. However, Murphy and Skinner conclude that the deliberations and output of the BCBS fall short of the standards set forth above, especially as they relate to the Basel 3 endgame proposals.

All of this, of course, is quite contrary to American rulemaking and such a process would be considered arbitrary and capricious (lacking credible and robust fact-finding), lacking a cost-benefit analysis, and/or ultra vires under APA standards. Nonetheless, such a process has resulted in the imposition of capital rules on the U.S. banking system that appear increasingly ill-suited for our economy. However, American regulators have acted with nearly unbridled discretion over the last 20 years to impose those capital requirements. Murphy and Skinner ask the question "why were the U.S. banking regulators being pulled along with Basel's tide, despite the lack of clear U.S. authorizing law and no U.S. specific factual basis and support?" They note that Congress should be able to ensure itself not only of the nature of the Basel bargain but that "any related regulation is anchored in U.S. law and consistent with U.S. interests." That is certainly consistent with the broad views of this Administration.

Second, in a forthcoming article in the Texas A&M Law Review, Dean Julie Andersen Hill of the University of Wyoming College of Law has drafted an article on "Governmental Debanking" which traces the controversies in connection with the "debanking" of a wide variety of legal businesses through bank supervisory programs known as "Operations Chokepoint 1.0 and 2.0." In her article, Dean Hill is critical of the broad use of discretionary authority by the bank regulators with respect to debanking, much as Murphy and Skinner are critical on the excessively broad discretion vested in the Basel Committee. Dean Hill notes that disavowals by federal banking agencies of debanking "lack persuasive power because they are inconsistent with the discretion the banking agencies claim broad power—including power that would allow them to engage in debanking—but they ask the public to believe that they do not use that power. In many cases, the banking regulator's power is so broad that banks have little opportunity to challenge it." This warning is not new. It reflects the skepticism of Thomas Jefferson when he warned against concluding that unlimited governmental powers will never be abused because current office holders "are not disposed to abuse them." This skepticism is a common thread running throughout American history, as recently expressed in Justice Sotomayor's point in Dubin v. United States, 599 U.S. 110, 131 (2023), that the Court "cannot construe a criminal statute on the assumption that the government will 'use it responsibly.'"

Dean Hill goes on to examine in detail two processes laden with discretion and which provide few opportunities for correction—the bank supervisory process and the Federal Reserve master account request process. She then recounts how the broad discretion of bank supervisors—protected from public view by the use of "confidential supervisory information"—may not have been adequately or properly exercised. This discretion, combined with the regulator's informal powers (such as meeting with bank managers and explaining their concerns, or sending the bank board a confidential letter accompanied by a list of Matters Requiring Attention) provide bank supervisors with an almost ungovernable amount of power. Such a concentration of power—nearly standardless in its discretion, effectively unappealable, and exercised in secret—is and should be troubling to Americans. It has resulted in: (a) proposed legislation in the House and the Senate curbing the practice of debanking; (b) the voluntary withdrawal by banking agencies of the use of reputation risk in connection with bank examinations; (c) a proposed regulation barring debanking as it has existed; and (d) the issuance of the President's Executive Order prohibiting debanking and mandating an investigation of those practices within banks.

In short, Americans are uncomfortable with the use of sweeping, unaccountable discretion which is not rules-based and is conducted in secret. That is and should be the case whether the actors are the Basel Committee or Federal Bank examiners. These concerns are reflected in recent judicial developments curbing administrative discretion, such as with respect to the now defunct Chevron doctrine and stricter adherence to the Major Questions Doctrine when interpreting statutes, as set forth in Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (2024). The limitations imposed by the APA are being taken seriously and construed more strictly. The seriousness of these APA limitations can be seen through much of the litigation challenging the de-regulatory actions of the Administration, most recently in National Treasury Employees Union, et al. v. Vought, No. 25-5091 (D.C. Cir. 2025). That opinion rejected the claims of plaintiffs that the Administration had "shut down" the CFPB because it had undertaken a variety of steps to shrink the CFPB's headcount and its scope of work. The Court stated that "the APA does not make federal courts 'roving commissions' assigned to pass on how well federal agencies are satisfying their statutory obligations." Rather, a court may intervene only when a specific unlawful action harms the plaintiff and only to the extent necessary to set aside that action.

These principles may come together in connection with the crafting of capital standards for the digital assets industry. This was seen in the President's Working Group Report on Digital Assets ("PWG Report"), in which the discussion of capital standards indicated a dissatisfaction with the overcomplexity and overly conservative nature of the crypto capital standards previously adopted by the BCBS. It directed American negotiators to engage with the Basel Committee toward the end of developing more simplified and less punitive standards. The PWG Report notes that the BCBS capital framework for crypto assets to exposures divides crypto assets into Group 1 (crypto assets that are backed by other traditional assets) and Group 2 (crypto assets other than Group 1) and then further divides Group 1 into Groups 1a and 1b and Group 2 into Groups 2a and 2b, requiring different analyses for each group and subgroup. (See footnote 290 and accompanying text for a description of the differences between the groups and subgroups.) The differences are shown on the following chart.

The PWG report further notes that the BCBS does not possess any former supranational authority and its decisions do not have legal force. The "standards" set by BCBS members are determined by consensus and it is important for the United States to lead in such international forums to ensure transparency of any such consensus decision making. That is, the PWG Report adopts the thinking expressed above by Murphy and Skinner in "Sovereignty and Legitimacy." The PWG Report goes on to state that the BCBS's four groups of crypto assets should be simplified; that the use of permissionless blockchains should be allowed for all groups of crypto assets; and that the calibration of capital requirements for credit risk, market risk, operational risk, and liquidity risk should be reviewed to incorporate empirical evidence of recent changes in crypto asset performance and risk. This is a far less complex and a far more crypto-friendly structure than that being used by the Basel Committee.

Given the ongoing criticism of overbroad regulatory discretion by Dean Hill and also by the White House, and given the skepticism being directed toward the Basel Committee processes by Professors Murphy and Skinner and others, and given the new energy being found in the courts for stricter enforcement of the requirements of the APA, it would appear that the stage may be set for the United States to chart a course sharply different from that set by the Europeans when it comes to designing capital standards for crypto assets. The banking trade groups are not indifferent to these issues, having written to the Basel Committee urging a pause and recalibration of the BCBS's Crypto asset Exposures Standards (SCO60) ahead of its January 2026 effective date to allow for a targeted consultation and redesign due to the "excessively conservative and overly punitive capital treatment of crypto assets" by the BCBS.

Notably, there is a competitive element to this. In the absence of change by the BCBS, simplified American capital standards will tend to drive crypto businesses toward the United States, following the stated goal of the Administration to make the United States "the crypto capital of the world." Wriston's Law (named for legendary American banker Walter Wriston) still holds in that capital (meaning money, talent, and ideas) "will go where it is wanted and stay where it is well-treated." The operation of Wriston's Law can be seen in the massive issuance of U.S. dollar-backed stablecoins subsequent to the passage of the GENIUS Act, which Treasury Secretary Bessent believes will strengthen U.S. dollar dominance in global currency markets.

Thus, there is a motivation for American bankers and regulators (including representatives of the FDIC, OCC, FRB, and FRB New York who sit on the Basel Committee) to adopt crypto capital standards suggested by the PWG Report regardless of those currently promoted by the BCBS. This will flip on its head the traditional process by which the Americans usually went along with whatever the Basel Committee had to say, and perhaps even "gold plate" the BCBS recommendations.

In the new environment post the PWG Report, Americans may simply assert they intend to use their more simplified (and more lenient) standards, and Basel may choose to come along or not, understanding the long-term impact it might have on the migration of crypto formation and innovation. This is particularly so given the past record of the Basel Committee operating in the dark and with a "Europe first" focus. Thus, the days of watching U.S. regulators uncritically accept the domestic mechanisms of the Basel Committee are likely to be over. In short, the more opportunities which can be created for crypto capital to migrate to the U.S., the better. Thus, while perhaps unintentional, the Basel Committee could become a significant ally in fulfilling the goal of the PWG Report and the Administration to make the United States the "Crypto Capital of the World."

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