FDIC Issues Joint Statement with Fed and OCC on Crypto Risks

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Related practices and jurisdictions

Saturday, January 7, 2023

On the first business day of the year, January 3, 2023, the Board of Governors of the Federal Reserve (the Fed), the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC), the the nations’ leading banking regulators, have come together to issue a joint statement on the risks of crypto-assets for banking organisations. Striking in its tone and released in light of the significant risks highlighted by the recent bankruptcies of several major crypto-asset companies, the purpose of the statement is to ensure that banks are doing what they can to ensure that Risks to the crypto-asset industry that cannot be mitigated or contained do not migrate to banking systems. While the statement reassures that banking organizations are neither prohibited nor discouraged from providing banking services to customers of a specific class or type, the message is clear that whenever a bank chooses to engage with a client involved in cryptocurrency activity, prudential regulators closely monitor supervision protocols to assess whether the bank has appropriate risk management in place, including board oversight, policies , procedures, risk assessments, controls, barriers and safeguards, and monitoring, to identify and effectively manage risks.

The statement includes a list of specific risks that banks should be aware of, including: the risk of fraud; legal uncertainties related to custody; inaccurate or misleading representations by crypto-asset companies; the significant volatility in crypto-asset markets and the impact that such volatility may have on deposit flows into crypto-asset companies; the susceptibility of stablecoin projects to create potential deposit outflows for banking organizations that hold reserves of stablecoins; risk of contagion within the broader crypto-asset industry due to elements such as opacity of loans, investments, financing, services and operational agreements; a lack of maturity in risk management and governance practices in the crypto-asset sector; and increased risks with open, public and/or decentralized networks where there is a lack of governance mechanisms to oversee systems (e.g., due to reliance on Digital Asset Organizations (DAOs) , smart contracts or other artificial intelligence technologies) and where there may be an absence of contracts or standards to clearly establish roles, responsibilities and obligations with respect to these networks.

On the last point, in particular, the joint statement shows that regulators are beginning to jump to conclusions about cryptocurrency networks that are simply too risky. In other words, if the governance of a cryptocurrency network is driven solely (or even primarily) by technology, and there is no or very little ability for humans to intervene, then this network may be deemed too risky for a bank to be involved in. Additionally, if the cryptocurrency network lacks clear rules about responsibility for compliance with the law (especially anti-money laundering laws) and what responsibilities each party to a transaction may have, then that network may also be considered too risky.

Copyright 2023 Cadwalader, Wickersham & Taft LLPNational Law Review, Volume XIII, Number 7

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