2 years ago
The US Federal Reserve, Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) warned banks astir the risks progressive with crypto successful a associated connection connected Jan. 3.
The connection noted that the past twelvemonth saw precocious volatility successful crypto prices and exposed vulnerabilities successful the sector. Therefore, the regulatory authorities highlighted immoderate cardinal risks banks should beryllium wary of portion dealing with crypto.
The authorities noted that the hazard of fraud and scams among crypto firms could perchance impact banks dealing with specified companies. In addition, the latest bankruptcy of FTX and fraud allegations against its laminitis Sam Bankman-Fried (SBF), could person perchance motivated the regulators to pass banks against specified risks.
The connection said that banks should besides beware of risks arising from ineligible uncertainty astir crypto custody services, redemptions, and ownership rights.
The regulators warned that crypto firms mightiness supply fraudulent disclosures and representations to banks. This could see misrepresentations astir national deposit security and different “unfair, deceptive, oregon abusive” practices that tin harm consumers.
The regulators were referring to defunct crypto speech Voyager Digital’s misleading statements astir FDIC coverage. As a result, connected July 28, 2022, FDIC warned Voyager Digital to cease misrepresenting facts astir FDIC security sum of idiosyncratic funds.
At the clip of bankruptcy filing, Voyager had assured users would get backmost the USD that Voyager deposited with the FDIC-insured Metropolitan Commercial Bank. However, the slope aboriginal clarified that the idiosyncratic deposits are FDIC-insured, but the security does not support customers successful the lawsuit of Voyager’s bankruptcy.
In the associated statement, regulators cited the important volatility of crypto markets, which tin interaction the deposit flows of crypto firms, arsenic a hazard for banks. Additionally, the connection warned that banks holding stablecoin reserves mightiness look important deposit outflows successful lawsuit of slope runs connected the stablecoin.
Furthermore, the national regulators warned against contagion hazard successful the crypto sector. The contagion hazard arises from the interconnectedness of crypto firms “through opaque lending, investing, funding, service, and operational arrangements,” the regulators said.
The domino effect observed aft the Terra-LUNA fiasco, which caused a bid of bankruptcies starting with hedge money Three Arrows Capital, proved that crypto firms are intricately connected. This was again highlighted aft FTX and Alameda Research’s collapse, aft which Genesis and its genitor institution Digital Currency Group landed successful blistery water.
According to the regulatory bodies, this interconnectedness presents “concentration risks” for banks exposed to cryptocurrencies.
Furthermore, the connection noted that the crypto sector’s hazard absorption and governance practices are successful their infancy and deficiency “maturity and robustness.” Besides, decentralized networks deficiency governance mechanisms, an oversight system, and contracts and standards that found roles, responsibilities, and liabilities.
Moreover, decentralized systems are susceptible to hacks and cyber-attacks, outages, and contiguous hazard of illicit finance, the authorities warned, adding:
“It is important that risks related to the crypto-asset assemblage that cannot beryllium mitigated oregon controlled bash not migrate to the banking system.”
The national agencies further stated that they are evaluating immoderate proposals from banks to prosecute successful crypto-related activities. They are besides intimately supervising banks with crypto exposure. The agencies added:
“Given the important risks highlighted by caller failures of respective ample crypto-asset companies, the agencies proceed to instrumentality a cautious and cautious attack related to existent oregon projected crypto-asset-related activities and exposures astatine each banking organization.”
However, the connection clarified that banks are neither “prohibited nor discouraged” to supply services to immoderate circumstantial benignant of companies, including crypto-related businesses.
Federal agencies proceed to measure whether oregon however banks tin behaviour crypto-related activities. According to the statement, their main interest is that specified activities should adequately code “safety and soundness, user protection, ineligible permissibility, and compliance with applicable laws and regulations.” This would see banks adhering to wealth laundering, illicit finance, and user extortion laws portion engaging successful crypto-related activities.
The agencies further noted:
“… the agencies judge that issuing oregon holding arsenic main crypto-assets that are issued, stored, oregon transferred connected an open, public, and decentralized network, oregon akin strategy is highly apt to beryllium inconsistent with harmless and dependable banking practices.”
The station US Federal Reserve, FDIC pass banks against crypto risks appeared archetypal connected CryptoSlate.
English (US) 