Federal Reserve, Major Banking Regulators Signal ‘Significant’ Concerns Over Crypto Assets

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

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

Given the significant risks highlighted by the recent failures of several large crypto-asset firms, agencies continue to take a cautious and conservative approach to current or proposed crypto-asset-related activities and exposures in every banking organization. .

Regulators are warning banks against a long list of crypto risks, including fraud, volatility, poor risk management, and contagion within the crypto industry.

The agencies also reported legal uncertainties regarding takeovers, ownership rights, and custody practices for 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 movables and conspiracy.

Bankman-Fried faces up to 115 years in prison for his alleged role in the most publicized crypto meltdown to date.

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

“Not in line with safe and sound banking practices”

While regulators are still exploring whether or how banks could integrate crypto into their operations in a secure way that protects consumers, the trifecta of regulators says issuing or holding crypto that is issued, stored, or transferred to an open, public or decentralized network is incompatible with security and sound banking practices.

“Based on the agencies’ current understanding and experience to date, the agencies believe that issuing or holding as primary crypto-assets that are issued, stored, or transferred over an open, public, and / or decentralized, or a similar system is highly likely to be incompatible with safe and sound banking practices,” the statement read.

The story continues

“In addition, agencies have significant safety and soundness concerns with business models that are concentrated in crypto-asset-related business or have concentrated exposures to the crypto-asset sector.”

The agencies oversee banks that may be exposed to crypto industry risks and review any proposals from banks to engage in crypto business.

The OCC has put in place rules that banks must apply for permission to be able to engage in crypto activities. Acting Comptroller of the Currency Michael Hsu compared crypto to derivatives in the early 2000s, warning of the risk of contagion with crypto and saying the industry’s growth has been driven by hype media.

The Financial Stability Supervisory Board closely monitors cryptocurrency markets, but has yet to consider crypto activities as systemic.

A few bills have been proposed in Congress to regulate crypto, but it will take time for the legislation to cross the finish line.

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