Regulators Warn US Banks of Crypto Risks Including “Fraud and Scams”

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Ether has hugely outperformed bitcoin since both cryptocurrencies bottomed in June 2022. Ether’s higher gains came as investors anticipate a major upgrade to the Ethereum blockchain called “the merger.”

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U.S. banking regulators warned financial institutions on Tuesday that dealing with cryptocurrency exposes them to an array of risks, including scams and fraud.

“Events of the past year have been marked by significant volatility and the exposure of vulnerabilities in the crypto-asset sector,” regulators said in a joint statement from the Federal Reserve, Federal Deposit Insurance Corp. and the Office of the Comptroller of Currency. The comments come just weeks after the dramatic collapse of crypto exchange FTX.

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Regulators said risks include: “fraud and scams among participants in the crypto-asset industry” and “the risk of contagion within the crypto-asset industry resulting from interconnections between certain crypto-asset participants” .

During the crypto boom, when financial players seemed to be announcing a new crypto partnership on a weekly basis, bank executives said they needed additional guidance from regulators before dealing more directly with bitcoin and other cryptocurrencies in retail and institutional businesses.

Today, roughly two months after FTX filed for bankruptcy, the industry is exposed to poor risk management, interconnected risks, and outright fraud.

While the statement said regulators were still weighing how banks could embrace crypto while meeting their various consumer protection and anti-money laundering mandates, they seemed to give a clue as to the direction in which they were headed. .

“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 inconsistent with safe and sound banking practices,” the regulators said.

They also said they have “significant security and soundness issues” with banks that focus on crypto customers or have “concentrated exposures” to the sector.

Traditional banks have largely avoided the crypto meltdown, unlike the 2008 financial crisis in which they played a pivotal role. One exception was Silvergate Capital, whose shares have been battered over the past year.

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