US Regulators Warn Banks To Be More Careful About Crypto Contagion Risks

Banks should be more cautious about the risks of fraud, legal uncertainty, and misleading disclosures by cryptocurrency firms, according to US regulators on Tuesday, just two months after the collapse of crypto exchange FTX stunned the financial world.

The Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) issued their first joint statement on crypto, expressing concerns about the safety and soundness of bank business models that are heavily reliant on crypto.

Banks that issue or hold crypto tokens stored on public, decentralized networks are “highly likely” to be inconsistent with safe and sound banking practices, according to the regulators, potentially undermining several lenders’ ongoing efforts to provide crypto services to customers.

The statement comes after months of reluctance by regulators to issue uniform guidance or rules on cryptocurrency, despite bank requests for more clarity.

The OCC previously stated that banks must seek regulatory approval before engaging in certain crypto-related activities, such as holding tokens on behalf of clients, whereas the Fed has instructed banks to notify their supervisors before proceeding with any crypto-related efforts.

According to the joint statement, the regulators are supervising banks that may be exposed to crypto-related risks and are carefully reviewing bank proposals to engage in crypto activities.

“It is important that risks related to the crypto-asset sector that cannot be mitigated or controlled do not migrate to the banking system,” the regulators said.

The announcement comes as digital asset companies deal with high-profile failures, most notably that of cryptocurrency exchange FTX. On Tuesday, founder Sam Bankman-Fried pled not guilty in federal court in Manhattan to eight criminal charges, including wire fraud and conspiracy to commit money laundering.

The Fed, FDIC, and OCC all emphasized various risks associated with cryptocurrency, such as market volatility, sector contagion, and poor risk management.

The regulators stated that they would issue additional statements on banks’ crypto-related activities as needed, and that they would continue to collaborate with other agencies on crypto issues.

(Adapted from ITNews.com.au)



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