*

US banks initial steps towards crypto are likely to be

tentative

*

Large lenders are hesitant to be the first to expand into

crypto

*

More banks are keen to be fast followers after a few test

cases

*

Banks seek more clarity around AML-crypto regulations

By Nupur Anand

NEW YORK, May 28 (Reuters) - Big U.S. banks are holding

internal discussions about expanding into cryptocurrencies as

they get stronger endorsements from regulators, but initial

steps will be tentative, centering on pilot programs,

partnerships or limited crypto trading, according to four

industry executives.

Wall Street giants that had been largely blocked from many

crypto activities by strict regulations are poised to grow

quickly.

Yet the biggest lenders are still hesitant to be the first

among rivals to expand too heavily into crypto in case they fall

afoul of changing rules, said the four executives, who declined

to be identified since they were discussing internal business

plans.

If a major firm expands without issues, others will be fast

followers to run small-scale pilot projects and weigh other

business prospects, the executives said.

Jamie Dimon, CEO of the largest U.S. bank, JPMorgan Chase ( JPM )

, ruled out getting into custody - storing crypto assets

for clients - or expanding significantly even if regulations

ease.

"When I look at the bitcoin universe, the leverage in the

system, the misuse in the system, the money laundering issues,

trafficking, I'm not a fan of it," Dimon, a longtime crypto

skeptic, told investors last week.

"We're going to allow you to buy it, we're not going to

custody it. ... I don't think you should smoke, but I defend

your right to smoke. I defend your right to buy bitcoin," he

added.

U.S. President Donald Trump vowed to become the first

"crypto president" before he took office. He has since wooed the

industry's elite at the White House, promised to boost the

adoption of digital assets and said he aims to create a

strategic bitcoin reserve.

While there are welcoming signs, banks are seeking even

clearer guidelines from the government clarifying what they can

do in crypto, more than half a dozen industry executives said.

"The shift in the stance is encouraging for traditional

lenders, but they are still approaching it with caution and

viewing the changes in regulation as an opportunity to engage

and not a free pass," said Dario de Martino, A&O Shearman M&A

partner who works on crypto-related issues.

Custody businesses to store and manage crypto assets are

promising, bankers and executives said, but they have thin

margins and potentially pose high risks.

Most banks are likely to enter custody businesses through

partnerships with existing crypto firms, sources said.

Charles Schwab CEO Rick Wurster told Reuters earlier this

month that the traffic lights from financial regulators were

flashing "pretty green" for large firms to grow in crypto. The

signals have reinforced Schwab's plans to offer spot crypto

trading within a year, he said.

New regulators under Trump have also signaled more

bank-friendly crypto policies. The U.S. Office of the

Comptroller of the Currency paved the way for lenders to engage

in some crypto activities, such as custody, some stablecoin

activities and participation in distributed ledger networks.

The Securities and Exchange Commission also scrapped earlier

accounting guidance that made it expensive for banks to deal in

crypto.

Bank of America ( BAC ) could launch stablecoins, its CEO

Brian Moynihan said earlier this year, and the U.S. banking

industry will embrace cryptocurrencies for payments if

regulations permit them.

Meanwhile, Morgan Stanley ( MS ) wants to work with

regulators to see how it can be a middleman for crypto-related

transactions, CEO Ted Pick said earlier this year. The lender is

also exploring adding crypto to its e-trade platform, a source

said.

Some of the large banks are also exploring issuing a joint

stablecoin, with the conversations in initial stages, another

banking source said.

Big banks seek more clarity around anti-money laundering

rules and supervision before diving deeper into crypto. They are

also asking for consistent guidelines across banking and market

regulators before launching new businesses in digital assets,

whose values are volatile.

For now, banks are weighing their crypto prospects and

running small-scale pilot programs.

"While a much-improved environment, banks will continue to

have concerns around anti-money laundering and regulatory

compliance," said Matthew Biben, co-head of the global financial

services group at law firm King & Spalding.

SHIFTING LANDSCAPE

Banks want to understand if they can engage in crypto

lending, or if they are allowed to become market makers for

digital assets, one of the banking sources said.

The rules for traditional banking businesses are very well

defined and there is complete clarity over what a bank is

allowed to do and what is outside their ambit, similar

well-defined guidelines are needed for digital assets too.

The working group on crypto under David Sacks, the

Trump-appointed crypto czar, has no representation from banking

regulators, which needs to be amended if the big banks are

allowed to play any meaningful role in the business, two banking

sources said.