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US Regulators Warn Banks of Crypto Risks

US federal bank regulatory agencies have issued a joint statement, drawing attention to the risks for banking organisations associated with crypto-assets and the crypto-asset sector. The statement also covers the agencies’ approaches to supervision of the crypto industry.

The US Board of Governors of the Federal Reserve System (Federal Reserve Board), the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) collaborated to release the statement concerning crypto-asset risk.

The statement itself focuses on the risks associated with crypto-assets and the crypto sector. It covers how the well-documented volatility of crypto over the past year demonstrates the significant risks that involvement brings. It also highlights the vulnerabilities of the industry, attempting to ensure banking organisations in the US are aware.

The statement comes shortly after the collapse of the crypto trading platform FTX. At a time when caution is paramount in the industry, the statement comes to ensure the safety of US banking organisations.

Because of the existing risks, the federal bank regulatory agencies have advised a cautious approach to crypto-assets. The regulators also continue to keep a close eye on crypto-asset-related activities and exposures at banking organisations. The agencies look to asses how crypto-asset-related activity can be conducted more safely and in compliance with existing laws and regulations. The statement focuses on its aim to protect consumers by promoting a cautious approach to crypto as a whole.

The agencies also explained their plans to issue additional statements related to engagement in crypto-asset-related activities.

Regulatory warnings for crypto-asset activity

In the statement, the regulators warn of a high risk of fraud and scams among crypto-asset sector participants. Some of the other key warnings within the statement include:

  • Significant volatility in crypto-asset markets
  • Risk management and governance practices in the sector that display a lack of maturity and robustness
  • Significant risks associated with open, public or decentralised networks, or similar systems – this includes a lack of governance mechanisms establishing oversight of the system; the absence of contracts or standards to clearly establish roles, responsibilities, and liabilities
  • Vulnerability to cyber-attacks, outages and more was also referenced as a risk to consider

The statement also brought attention to the “contagion risk” of crypto-assets. The knock-on effects from negative news in crypto were highlighted by the negative impact of the FTX news on the value of crypto assets.

The regulatory bodies also explained that they have “significant safety and soundness concerns” with
business models that have significant exposures to the crypto-asset sector.

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