The US Federal Reserve, Federal Deposit Insurance coverage Company (FDIC), and the Workplace of the Comptroller of the Forex (OCC) warned banks in regards to the dangers concerned with crypto in a joint assertion on Jan. 3.
The assertion famous that the previous yr noticed excessive volatility in crypto costs and uncovered vulnerabilities within the sector. Due to this fact, the regulatory authorities highlighted some key dangers banks must be cautious of whereas coping with crypto.
The authorities famous that the chance of fraud and scams amongst crypto companies may doubtlessly have an effect on banks coping with such corporations. As well as, the most recent chapter of FTX and fraud allegations towards its founder Sam Bankman-Fried (SBF), may have doubtlessly motivated the regulators to warn banks towards such dangers.
The assertion mentioned that banks also needs to watch out for dangers arising from authorized uncertainty round crypto custody providers, redemptions, and possession rights.
The regulators warned that crypto companies would possibly present fraudulent disclosures and representations to banks. This might embody misrepresentations about federal deposit insurance coverage and different “unfair, misleading, or abusive” practices that may hurt customers.
The regulators had been referring to defunct crypto alternate Voyager Digital’s deceptive statements about FDIC protection. In consequence, on July 28, 2022, FDIC warned Voyager Digital to stop misrepresenting info about FDIC insurance coverage protection of consumer funds.
On the time of chapter submitting, Voyager had assured customers would get again the USD that Voyager deposited with the FDIC-insured Metropolitan Industrial Financial institution. Nevertheless, the financial institution later clarified that the consumer deposits are FDIC-insured, however the insurance coverage doesn’t shield prospects within the case of Voyager’s chapter.
Within the joint assertion, regulators cited the numerous volatility of crypto markets, which may affect the deposit flows of crypto companies, as a danger for banks. Moreover, the assertion warned that banks holding stablecoin reserves would possibly face vital deposit outflows in case of financial institution runs on the stablecoin.
Moreover, the federal regulators warned towards contagion danger within the crypto sector. The contagion danger arises from the interconnectedness of crypto companies “via opaque lending, investing, funding, service, and operational preparations,” the regulators mentioned.
The domino impact noticed after the Terra-LUNA fiasco, which brought on a sequence of bankruptcies beginning with hedge fund Three Arrows Capital, proved that crypto companies are intricately related. This was once more highlighted after FTX and Alameda Analysis’s collapse, after which Genesis and its guardian firm Digital Forex Group landed in scorching water.
In keeping with the regulatory our bodies, this interconnectedness presents “focus dangers” for banks uncovered to cryptocurrencies.
Moreover, the assertion famous that the crypto sector’s danger administration and governance practices are of their infancy and lack “maturity and robustness.” Moreover, decentralized networks lack governance mechanisms, an oversight system, and contracts and requirements that set up roles, duties, and liabilities.
Furthermore, decentralized programs are susceptible to hacks and cyber-attacks, outages, and current danger of illicit finance, the authorities warned, including:
“It will be significant that dangers associated to the crypto-asset sector that can not be mitigated or managed don’t migrate to the banking system.”
The federal businesses additional acknowledged that they’re evaluating any proposals from banks to interact in crypto-related actions. They’re additionally carefully supervising banks with crypto publicity. The businesses added:
“Given the numerous dangers highlighted by latest failures of a number of giant crypto-asset corporations, the businesses proceed to take a cautious and cautious strategy associated to present or proposed crypto-asset-related actions and exposures at every banking group.”
Nevertheless, the assertion clarified that banks are neither “prohibited nor discouraged” to offer providers to any particular kind of corporations, together with crypto-related companies.
Federal businesses proceed to guage whether or not or how banks can conduct crypto-related actions. In keeping with the assertion, their foremost concern is that such actions ought to adequately deal with “security and soundness, shopper safety, authorized permissibility, and compliance with relevant legal guidelines and rules.” This would come with banks adhering to cash laundering, illicit finance, and shopper safety legal guidelines whereas participating in crypto-related actions.
The businesses additional famous:
“… the businesses imagine that issuing or holding as principal crypto-assets which might be issued, saved, or transferred on an open, public, and decentralized community, or related system is extremely prone to be inconsistent with secure and sound banking practices.”