Top U.S. Banking Supervisors Issue Joint Warning Over Crypto Activities

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(Bloomberg) – Top U.S. banking regulators have issued a new warning to lenders about the risks associated with crypto mining.

The Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency detailed their concerns about the volatile asset class on Tuesday. Officials said in a statement that it is important that risks that cannot be controlled are not allowed to migrate into the banking system.

The events of the past year have been marked by significant volatility and the exposure of vulnerabilities in the crypto-asset sector, the agencies said.

The warning follows a particularly tough time for the crypto. The November collapse of the FTX exchange left customers around the world facing the potential for billions of dollars in losses.

Federal watchdogs insisted that the impact on the wider financial system of the FTX implosion was minimal. However, it has prompted calls for US regulators to do more to prevent further calamities.

It is important that risks in the crypto-asset sector that cannot be mitigated or controlled do not migrate to the banking system, regulators said.

Supervisors have said they will continue to take a cautious and conservative approach to current or proposed crypto-asset-related activities and exposures at each banking organization.

Some of the risks identified by regulators include:

Fraud and scams. Legal uncertainties around custody. Misleading claims from crypto companies. Contagion within the crypto sector.

Although Wall Street has been slow to embrace crypto, the collapse of FTX has revealed how some smaller US banks have become involved in the sector. For example, the company listed in bankruptcy filings Silvergate Capital Corp. and Signature Bank, both of which are federally regulated, as places where it or related entities had accounts. Both companies said exchange-related deposits make up a very small percentage of their overall deposits.

On Tuesday, Signature Bank said it supports regulators focusing on crypto and has taken steps to significantly reduce deposit concentrations related to crypto and other customers. We do not lend in this space, trade, invest or hold crypto assets, the company said. Silvergate declined to comment on the joint statement from the watchdogs.

In October, Bank of New York Mellon Corp. announced the launch of a digital asset platform in the United States to allow certain customers to hold and transfer Bitcoin and Ether. The company declined to comment on the regulators statement.

On Tuesday, the watchdogs took particular issue with what they said were business models that had concentrated exposure to the sector. 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 transferred over an open, public, and / or decentralized, or a similar system is very likely to be incompatible with safe and sound banking practices, the agencies said.

Lee Reiners, policy director at the Duke Financial Economics Center and former banking examiner at the New York Fed, said the comment signals that regulators don’t want banks to hold crypto on their balance sheets, excluding services. on guard.

Yet officials have refrained from announcing additional rules or a new crackdown on the sector. They also didn’t mention any company by name.

I find the response inadequate given what we’ve learned about the extent of fraud, misuse of client assets and other misconduct, said Arthur Wilmarth, professor emeritus at the University’s Law School. George Washington University. I would expect them to have a higher sense of concern about this whole area.

–With the help of Yueqi Yang.

(Updates with decline to comment in 10th paragraph.)

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