Federal Reserve, Top Banking Regulator Flags ‘Significant’ Concerns About Crypto Assets

The Federal Reserve, the FDIC and the Office of the Comptroller of the Currency (OCC) issued a joint statement on Tuesday warning of the “significant” risks that crypto-assets may pose to the broader banking system.

“It is important that risks associated with the crypto asset sector that cannot be mitigated or controlled do not migrate into the banking system,” the agencies said in a joint statement.

“Given the significant risks highlighted by the recent failures of several major crypto-asset firms, the agencies continue to take a careful and cautious approach regarding current or proposed crypto-asset-related activities and exposures at any banking organization.”

Regulators warn banks of a long list of risks when it comes to crypto, including fraud, volatility, poor risk management and contagion within the crypto sector.

Agencies have also flagged legal uncertainties when it comes to buybacks, ownership rights and custody practices of crypto assets.

Tuesday’s statement came just minutes before Sam Bankman-Fried, co-founder and former CEO of failed crypto exchange FTX, pleaded not guilty to eight counts of wire fraud, securities fraud and conspiracy.

Bankman-Fried faces up to 115 years in prison for his alleged role in the biggest cryptocurrency collapse to date.

Former FTX CEO Sam Bankman-Fried, who faces fraud charges over the collapse of the bankrupt cryptocurrency exchange, leaves after a hearing in Manhattan federal court in New York, U.S., January 3, 2023. REUTERS/Andrew Kelly

Former FTX CEO Sam Bankman-Fried, who faces fraud charges over the collapse of the bankrupt cryptocurrency exchange, leaves after a hearing in Manhattan federal court in New York, U.S., January 3, 2023. REUTERS/Andrew Kelly

“Inconsistent with safe and sound banking practice”

While regulators are still studying whether and how banks can incorporate crypto into their operations in a secure way that protects consumers, the trifecta of regulators says that issuing or holding crypto that is issued, stored or transmitted on an open, public or decentralized network is “inconsistent” with a secure and sound banking practices.

“Based on the agencies’ current understanding and experience to date, the agencies believe that issuing or holding as principal crypto assets that are issued, stored, or transmitted on an open, public, and/or decentralized network or similar system is highly unlikely to be consistent with safe and sound banking practice”, the press release states.

“Furthermore, agencies have significant concerns about the safety and soundness of business models that are concentrated in crypto-asset-related activities or have concentrated exposure to the crypto-asset sector.”

The agencies monitor banks that could be exposed to risks from the crypto sector and review all bank proposals for involvement in crypto activities.

The OCC has introduced rules that require banks to seek permission to engage in any crypto activities. Acting Comptroller of the Currency Michael Hsu compared cryptocurrencies to derivatives in the early 2000s, warning of the risk of crypto contagion and saying the industry’s growth was fueled by hype.

The Financial Stability Oversight Council closely monitors cryptocurrency markets, but has not yet deemed crypto activity systemic.

Several bills have been proposed in Congress to regulate cryptocurrency, although it will take time for legislation to make its way through.

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