‘Crypto Winter’ Prompts US Regulators to Jointly Warn Banks of Cryptocurrency Risks

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Last year was a tough time for crypto investors, with billions of dollars wiped out in the cryptocurrency market and the collapse of major exchange FTX, which weakened sentiment towards digital assets.

The fallout saw people losing their life savings overnight, with over a million people and businesses allegedly owing money to FTX.

In light of the events of 2022, major financial regulators in the United States have come together for the first time to warn banks of the risks of being tied to the unpredictable crypto industry.

In a joint statement on Tuesday, the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency sounded the alarm about the risks crypto assets pose to banking organizations.

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. These events highlight a number of key risks associated with crypto-assets and crypto-asset industry players that banking organizations should be aware of.

Last year, cryptocurrencies at all levels suffered a widespread sell-off known as Crypto Winter, with over $200 billion wiped from the market in a single day in June. Some experts have predicted that the phenomenon could last until 2023 and possibly continue into next year.

The selloff, exacerbated by the implosion of major crypto exchange FTX in November, has led to speculation over whether the world is witnessing the end of crypto, with some predicting FTX’s collapse as markets of the moment Lehman cryptocurrency.

In addition to warning lenders of significant volatility in crypto markets, U.S. regulators on Wednesday urged financial institutions to beware of the risk of fraud and scams within the crypto industry, as well as legal uncertainties. related to property rights and a lack of robust risk. management and governance practices in cryptocurrency businesses.

Also among regulators’ long list of risk factors surrounding the crypto sector was a warning of contagion risk from issues such as lending, investment, funding, services and opaque operational agreements.

They added that there were heightened risks associated with decentralized networks, which included vulnerabilities related to cyberattacks, outages, lost or trapped assets, and illicit financing.

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

Although they noted that banks in the United States are neither prohibited nor discouraged from providing services to customers operating in the crypto industry, issuing or holding crypto assets was very likely to be inconsistent. with safe and sound banking practices.

Banking organizations must ensure that activities related to crypto-assets can be carried out in a safe and sound manner, are legally permitted, and comply with applicable laws and regulations, including those designed to protect consumers (such as fair lending and prohibitions on deceptive or abusive acts or practices), officials said.

[Banks] must ensure appropriate risk management, including board oversight, policies, procedures, risk assessments, controls, barriers and safeguards, and monitoring, to identify and effectively manage risk.

What do banks think of crypto?

Wall Street banks are divided on the merit of cryptocurrencies, especially in the wake of a turbulent 2022.

JP Morgan CEO Jamie Dimon, a renowned crypto skeptic, has compared investing in cryptocurrencies to buying useless pet stones.

However, JP Morgan, like Morgan Stanley and Goldman Sachs, has a dedicated group to focus on cryptocurrency.

According to CNBC, Deutsche Bank, Wells Fargo, Citigroup, and Bank of America have invested in crypto staffing divisions in recent years, while Standard Chartered, UBS, and BNY Mellon had invested millions in crypto assets by 2021. Business Insider reported.

Others have taken a much more cautious approach.

HSBC, for example, said in 2021 that it would refuse to process cryptocurrency payments in Britain.

While many lenders have jumped on the crypto bandwagon in recent years, many have warned that market investors may suffer further.

In a research note late last year, Standard Chartereds global head of research Eric Robertsen warned that investors could be caught off guard by a surprise Bitcoin drop that would send the digital asset lower. an additional 70% in 2023.

Meanwhile, analysts at JPMorgans believe its bottom has yet to be bottomed, with the bank predicting in November that it will fall to around $13,000 as the crypto market experiences a cascade of margin calls.

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