Federal Banking Agencies Release Joint Statement Highlighting Key Crypto Risks

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On January 3, 2023, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) (collectively, the Agencies) issued a joint statement that reiterates certain aspects of previous crypto-asset guidance and highlights the risks for banking organizations (the joint statement). The joint statement signals that the agencies will take an increasingly cautious approach to reviewing the crypto-asset activities and business models of banking organizations to ensure that risks in the crypto-asset industry that cannot be mitigated or controlled do not migrate to the banking system.[1]

Joint statement identifies eight key risks for banking organizations associated with crypto-assets[2] and the crypto-asset sector. These main risks include:

Risk of fraud and scams among players in the crypto-asset industry. Legal uncertainties related to custody practices, redemptions and property rights, some of which are currently the subject of legal proceedings. Inaccurate or misleading statements and disclosures by crypto-asset companies, including misrepresentations regarding federal deposit insurance and other practices that may be unfair, misleading or abusive, contributing to material harm to retail investors and institutions, clients and counterparties. Significant volatility in crypto-asset markets, the effects of which include potential impacts on deposit flows associated with crypto-asset companies. Susceptibility of stablecoins to risk, creating potential deposit outflows for banking organizations that hold reserves of stablecoins. Risk of contagion within the crypto-asset industry resulting from interconnections between certain crypto-asset participants, lending, investing, financing, servicing, and operational arrangements. These interconnections can also present concentration risks for banking organizations exposed to the crypto-asset sector. Risk management and governance practices in the crypto-asset sector showing a lack of maturity and robustness. similar networks or 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.

The joint statement explicitly states that the agencies do not prohibit or discourage banking services of any specific class or type, provided the services are authorized by law. The agencies continue to assess current and proposed activities related to crypto-assets by banking organizations to determine how these activities can be conducted in a manner that adequately takes into account security and soundness, protection consumers, legality and compliance with applicable law. 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. Additionally, the agencies warn that they have significant security and soundness concerns with business models that are concentrated in crypto-asset-related business or have concentrated exposures to the crypto-asset sector. The joint statement does not define the level of concentration in crypto-assets. – asset-related activities would pose security and soundness issues.

If you have any questions regarding the joint statement or any of the topics discussed in the joint statement, please do not hesitate to contact any of the authors of this alert.

[1]Joint Statement on Crypto-Asset Risks to Banking Organizations, Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency (January 3, 2023).

The joint statement follows other actions taken by the agencies. See OCC Interpretative Letter 1179 on Chief Counsel Interpretation clarifying: (1) a bank’s authority to engage in certain cryptocurrency activities; and (2) Power of the OCC to establish a national trust bank (November 18, 2021); Federal Reserve Board SR 22-6 / CA 22-6: Engagement in Crypto-Asset-Related Activities by Federal Reserve-Supervised Banking Organizations (August 16, 2022); and FIL-16-2022 FDIC Supervisory Notification and Feedback Procedures for FDIC-Supervised Institutions Engaging in Crypto-Related Activities (April 7, 2022).

[2]The Common Statement defines a crypto-asset as any digital asset implemented using cryptographic techniques.

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