Banking Regulators Issue Joint Statement on Crypto Risks | Latham & Watkins LLP

[ad_1]

Banking organizations should provide proper risk management, but regulators are skeptical of some crypto business as a principal.

On January 3, 2023, the Board of Governors of the Federal Reserve System (Federal Reserve), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) (collectively, the Agencies) issued a notice concise joint statement on the risks associated with crypto-assets for banking organisations.

In a similar vein, on January 7, 2023, Mark Van Der Weide, General Counsel of the Federal Reserve, and Benjamin McDonough, General Counsel of the OCC, delivered remarks before the Banking Law Committee from the Business Law Section of the American Bar Association, reiterating that their agencies were staying the course on their “cautious and careful” approach to crypto.

Keeping in mind the safety and soundness of the US banking system, the statement addresses the various risks that the agencies consider to be associated with crypto-assets and players in the crypto-asset industry. According to the statement, “banking organizations should 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.”

Banking organizations should be aware of (and, where appropriate, mitigate) the following risks associated with crypto-assets:

Fraud and scams Custody practices, takeovers and proprietary rights Inaccurate or misleading representations and disclosures Misrepresentations regarding FDIC coverage Unfair, deceptive or abusive practices Volatility and flow of deposits Risks associated with stablecoins Risks of contagion associated with interconnectivity between market players Concentration risks due to overexposure or interconnected exposures Inadequate risk management and governance practices Lack of governance mechanisms for open, public or decentralized networks Lack of clearly established roles, responsibilities and accountabilities Cybersecurity, hacking , technology and service outages

Agencies expect these risks to be mitigated or controlled and prevented from spreading to the banking system. Appropriate risk management is prescribed for banking organizations to identify and manage crypto-asset risks (including board oversight, policies, procedures, risk assessments, controls, barriers and guardrails, and surveillance).

Of particular importance to token issuers, custodians, and decentralized finance protocols, the statement asserts that “the issuance or holding as principal of crypto-assets that are issued, stored, or transferred over an open network , public and/or decentralized, or a similar system is very likely to be inconsistent with safe and sound banking practices.Mr. Van Der Weide reiterated this statement in his remarks, while noting that the Federal Reserve was still considering activities non-core, such as acting as an intermediary between clients and crypto firms.

In his remarks, McDonough said the OCC’s semi-annual Risk Outlook report for fall 2022 accurately predicted three key risks that had recently emerged: that crypto risk management practices lack maturity , that stablecoins were still susceptible to risk and that there was a high risk of contagion among industry participants.

The agencies’ statement is fully aligned with that of the New York State Department of Financial Services (NYDFS) in its recent guidance to covered institutions engaging (or seeking to engage) in debt-related activities. virtual currency (see this article by Latham for more information). information).

The agencies note that they will continue to monitor current and emerging risks related to crypto-assets on the one hand, and banking sector engagement and exposure on the other.

[ad_2]