Understanding the True Scope of a Financial Firm’s Exposure to Crypto | Insights and Events

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With crypto winter upon us, most regulated financial institutions understand that if they want to engage directly in cryptocurrencies i.e. operate exchanges, provide custody services, issue tokens , they may need to obtain approval from a US state or federal regulator. Indeed, the New York Department of Financial Services (“NYDFS”) recently announced that any NY-regulated entity must submit a business plan 90 days before engaging in certain specified crypto activities. (For more on that, read our coverage of NYDFS tips and takeaways.)

But the ongoing fallout from the bankruptcies of top crypto firms such as FTX, BlockFi, Voyager Digital, and Celsius Network have highlighted a new set of crypto-related risks that financial institutions need to consider. For example, on December 7, 2022, in letters sent to the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, Senators Elizabeth Warren and Tina Smith expressed concern that ” crypto firms may have closer ties to the banking system than previously understood. Concerned about possible contagion from future corporate meltdowns, the letter highlights traditional banks’ exposure to the crypto system beyond the management of crypto itself, including crypto firm investments and l lending to crypto businesses or in connection with margin trading. (These risks are in addition, of course, to the other risks that come with any financial institution doing business with a company accused of impropriety, including litigation by private plaintiffs.) According to the letters, these activities raise potential issues security and soundness, and the senators asked regulators for a range of information regarding the crypto and crypto-related activities of the institutions under surveillance.

This focus on potential crypto contagion will likely persist. Given the high visibility of the FTX collapse, financial institutions should expect regulators, both federal and state, to continue their close scrutiny of the crypto industry, potentially looking beyond actual crypto services and in the kinds of second-order connections highlighted in the Warren-Smith letter, as regulators are doing with regard to banking partnerships with fintechs in pandemic-related programs such as the program paycheck protection. As with any regulator priority, companies should consider whether they should get ahead of their regulators and investigate their own ties to crypto firms, a process similar to the data mapping that many companies have done to prepare for the update. EU GDPR implementation. In addition to understanding your own business risks, an analysis already performed can help build regulators’ long-term confidence that your financial institution has mastered this area of ​​recent interest.

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