US regulators warn banks over cryptocurrency risks
US regulators have issued their first ever joint warning to banks over the risks associated with the cryptocurrency market.
The watchdogs told financial institutions to be wary of potential fraud, legal uncertainty and misleading disclosures by digital asset firms. Banks were also cautioned over the "contagion risk" from the sector. It comes just two months after the collapse of trading platform FTX sent shockwaves through the crypto industry.
In the joint statement, the US Federal Reserve, Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency said they were closely monitoring the crypto activities of banking organisations.
"The events of the past year have been marked by significant volatility and the exposure of vulnerabilities in the crypto-asset sector," the statement said.
The regulators also said that issuing or holding crypto tokens, which are stored on public, decentralised networks was "highly likely to be inconsistent with safe and sound banking practices". Banks were also encouraged to take steps to avoid problems in the digital asset market spreading to the wider financial system.
"It is important that risks related to the crypto-asset sector that cannot be mitigated or controlled do not migrate to the banking system," it added. Banks should be more careful about the risks of fraud, legal uncertainty and misleading disclosures by crypto firms, U.S. regulators warned on Tuesday, just two months after the collapse of crypto exchange FTX stunned the financial world.
The pronouncement comes as digital asset companies reckon with highprofile collapses, most notably that of crypto exchange FTX.
Founder Sam Bankman-Fried pled not guilty to eight criminal charges, including wire fraud and conspiracy to commit money laundering, in a Manhattan federal court on Tuesday.
In their first joint statement on crypto, the Federal Reserve, Federal Deposit Insurance Corp (FDIC) and the Office of the Comptroller of the Currency (OCC) said they had concerns with the safety and soundness of bank business models that are highly concentrated in crypto.
Banks issuing or holding crypto tokens stored on public, decentralized networks are "highly likely" to be inconsistent with safe and sound banking practices, the regulators added, potentially dealing a blow to several lenders' ongoing efforts to provide crypto services to customers.
The OCC has previously said banks must obtain regulatory approval before engaging in certain crypto-related activities, such as holding tokens on behalf of clients, while the Fed has instructed banks to notify their supervisors before moving forward with any efforts involving crypto. The regulators said they are supervising banks that may be exposed to crypto-related risks and are carefully reviewing bank proposals to engage in crypto activities, according to the joint statement.
The Fed, FDIC and OCC emphasized numerous risks associated with crypto, including the volatility of digital asset markets, contagion risk within the sector and weak risk management.
The regulators said they would issue further statements on banks' cryptorelated activities as warranted and would continue to work with other agencies on crypto issues. Tuesday's statement comes after months of hesitancy by US financial industry watchdogs to issue uniform guidelines on cryptocurrencies, despite banks inviting clearer advice from regulators.