Federal Reserve, FDIC & OCC warns About Risks Against Crypto Assets

• The Federal Reserve, OCC and FDIC issued a joint statement regarding the potential risk of crypto assets. 
• OCC is reviewing banks asking permission to engage in crypto assets.
• Acting OCC says crypto is purely driven by hype. 

Cryptocurrencies are majorly considered a risky business, and to top that fear, The Federal Reserve, Federal Deposit Insurance Corporation (FDIC), and the office of the Comptroller of the Currency (OCC) jointly issued a statement on Tuesday warning of the considerable risks these crypto assets might have against the broader banking system. 

The joint statement says, 

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

Considering the flaws highlighted by the recent failures and collapses, the concerned agencies continue taking a cautious approach concerning the current or proposed crypto activities and exposures at each banking organization. 

Regulators here are trying to warn banks about the risks involved with crypto, including fraud, poor risk management, volatility and contagion. 

As crypto is still a highly unregulated market, there is an added risk of redemptions, ownership rights, custodial practices etc. 

The inception of crypto was to challenge the very existence of banks. Still, things have changed a lot, and regulators are trying to find common ground where banks and crypto could incorporate their operations, providing customers with the best of both worlds. 

The trio says that the issuance and holding of crypto that’s issued, stored or transferred on an open, public or decentralized network is inconsistent with safe and sound banking practices. 

Furthermore, the agencies have noteworthy safety concerns for the business models with cryptocurrency at their center or considerable exposure to the crypto asset sector. The agencies are keeping a keen eye on the banks who knowingly or unknowingly exposed themselves to the crypto industry risks and are reviewing the proposals banks submitted to engage in crypto activities. 

As the rules state, any bank wanting to engage in any crypto-related activity must take permission from the OCC.  

The acting Comptroller of the Currency, Michael Hsu, compared crypto to derivatives in the early 2000s. He warned about the risk of contagion with crypto as he believed that the growth is driven purely by hype. 

Cryptocurrency markets are being watched closely by the Financial Stability Oversight Council, but they are yet to deem crypto activities to be systematic. 

What can the crypto industry expect from the 118th US Congress?

The US Congress started on January 3, 2022, and the crypto industry expects some groundbreaking rules and regulations to come out in due time. The main focus would be the FTX saga, where Sam had pleaded ‘Not Guilty’ for all 8 allegations. 

Congress seems to be divided into pro-crypto vs. anti-crypto, but 100+ crypto lobbyists are trying their best to strike a balance. The world can hope for better results regarding regulations over the crypto industry. 

Reports suggest that regulations regarding stablecoins, agency jurisdictions, and interagency cooperation could be discussed and finalized. 

Nancy J. Allen is a crypto enthusiast and believes that cryptocurrencies inspire people to be their own banks and step aside from traditional monetary exchange systems. She is also intrigued by blockchain technology and its functioning.

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