Federal Reserve, other U.S agencies warn banks about crypto

• Top U.S agencies, including the Federal Reserve, have issued a warning to banks about their interaction with crypto assets. 
• The agencies have indicated that it may be unsafe for banks to accept crypto as principal. 

A joint statement released by the top regulatory authorities in the United States has revealed renewed warnings for the crypto industry as it heads into 2023. The market events that contributed to 2022’s crypto winter have prompted the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) to take this step.  

Risks related to the crypto-asset sector

The board of governors of the Federal Reserve released the “Joint Statement on Crypto-Asset Risks to Banking Organizations.” The FDIC and the OCC uploaded the content. The report revolves around the risks that the crypto industry poses to banking organizations. 

The statement read:

“The events of the past year have been marked by significant volatility and the exposure of vulnerabilities in the crypto-asset sector. These events highlight a number of key risks associated with crypto-assets and crypto-asset sector participants that banking organizations should be aware of.” 

The key areas to watch out for included legal uncertainties related to custody practices, fraud and scams among crypto firms and the overall volatility in this space. They emphasized the importance of preventing the migration of risks associated with the crypto sector into the banking system. 

Unsafe to hold crypto in balance sheets

It may be unsafe for banking organizations to issue or hold crypto-assets as principal. This was especially true if the said assets were issued, stored, or transferred on an open, and/or decentralized network. 

Moreover, the agencies clarified that banking organizations were not discouraged from providing banking services to specific customers. As for the future, the agencies would closely monitor crypto asset related exposure to banking organizations. Further statements outlining the engagement by banking organizations in crypto-asset-related activities can be expected soon. 

The relationship between crypto firms and banks came under scrutiny following the collapse of Bahamas based crypto exchange FTX. Lawmakers in the U.S grilled federal regulators regarding the same after FTX’s questionable relationship with California based Silvergate Bank came to light.