Federal Banking Regulators Warn of Crypto Risks | Troutman pepper

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On January 3, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency (the Agencies) issued a joint statement to banking organizations outlining a number of risks associated with crypto-assets. .

While the Agencies expressly state that “banking organizations are neither prohibited nor discouraged from providing banking services to customers of any specific category or type, to the extent permitted by law or regulation”, they warn nevertheless that “holding as principal crypto-assets that are issued, stored or transferred over an open, public and/or decentralized network, or similar system is very likely to be inconsistent with safe and sound banking practices. Some banks may interpret this to mean that in practice they cannot engage in such activities.In addition, the agencies state that they “have significant security and soundness concerns with the business models that are concentrated in crypto-asset-related businesses or have concentrated exposures to the crypto-asset sector. States will issue a similar statement.

Among the risks highlighted by the Agencies, which are not new, are:

Risk of fraud and scam; Legal uncertainties related to custody practices, redemptions and ownership rights of crypto assets; Inaccurate representations by crypto-asset companies, including misrepresentations regarding federal deposit insurance; Significant volatility in the crypto-asset markets; Susceptibility of stablecoins to risk; Risk of contagion within the crypto-asset sector resulting from interconnections between certain crypto-asset participants; Inadequate risk management and governance practices in the crypto-asset sector; and Heightened risks arising from lack of oversight, lack of clearly established roles, and vulnerabilities related to cyberattacks, outages, lost or trapped assets, and illicit financing.

The agencies further stated that they “supervise banking organizations that may be exposed to risks arising from the crypto-asset sector and carefully consider any proposal by banking organizations to engage in activities involving crypto-assets.” The joint statement concludes by advising banking organizations to ensure that activities related to crypto-assets are carried out in a safe and sound manner, in accordance with applicable laws and regulations. Banking organizations should also ensure proper risk management in order to effectively identify and manage inherent risks.

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