Fed, Regulators Warn of ‘Significant’ Crypto Asset Risks

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On Tuesday, the Federal Reserve, FDIC, and OCC issued a joint statement on the risks posed by crypto assets. Among other things, the statement addressed dangers to banks, such as fraud, inaccurate or misleading statements by crypto companies, and market volatility.

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According to the agencies, “risks in the crypto-asset industry that cannot be mitigated or controlled do not migrate to the banking system.” The release says they are approaching cryptoassets with caution due to the significant risks and failures of several major cryptoasset firms (see FTX). The Fed, FDIC, and OCC also said they are evaluating activities and proposed exposures to crypto assets at each banking organization to ensure maximum consumer protection as well as crypto compliance with existing laws.

The statement raised current concerns about cryptocurrency, including legal issues around redemptions and proper procedures for holding crypto assets. The statement was released shortly before Sam Bankman-Fried, co-founder of disgraced crypto exchange FTX, who faces more than 100 years in prison if convicted, pleaded not guilty to charges of conspiracy, wire fraud and securities fraud.

Although the agencies made a point of saying that “banking organizations are neither prohibited nor discouraged from providing banking services to customers of a specific class or type, as permitted by law or regulation”, they also stated that they “will continue to closely monitor crypto – asset-related exposures of banking organizations.”

One thing was clear, despite the misunderstandings: the Fed, FDIC, and OCC view decentralized systems as a minefield fraught with peril for unsuspecting investors:

Increased risks associated with open, public and/or decentralized networks, or similar systems, including, but not limited to, lack of governance mechanisms establishing system oversight; lack of contracts or standards to clearly establish roles, responsibilities and accountabilities; and vulnerabilities related to cyberattacks, failures, lost or trapped assets and illicit financing.

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