The Board of Governors of the Federal Reserve System (Federal Reserve), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) (collectively, the agencies) are issued “Joint Statement on Crypto-Asset Risks to Banking Organizations” on January 3rd, 2023.
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.
“Key-risks” associated with the crypto industry
This includes risk of fraud among crypto-asset sector participants, legal uncertainties related to custody practices, redemptions, and ownership rights, inaccurate representations and disclosures by crypto firms, Significant volatility in crypto-asset markets, Susceptibility of stablecoins to run risk, contagion risk within the crypto-asset sector, risk management and governance practices in the crypto-asset sector, and Heightened risks associated with open, public, and/or decentralized networks, or similar systems.
The US regulators detailed “The agencies continue to build knowledge, expertise, and understanding of the risks crypto-assets may pose to banking organizations, their customers, and the broader U.S. financial system. Given the significant risks highlighted by recent failures of several large crypto-asset companies, the agencies continue to take a careful and cautious approach related to current or proposed crypto-asset related activities and exposures at each banking organization.”
“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 agencies are supervising banking organizations that may be exposed to risks stemming from the crypto-asset sector and carefully reviewing any proposals from banking organizations to engage in activities that involve crypto-assets,” the joint statement emphasizes.
The statement continues, adding: “Based on the agencies’ current understanding and experience to date, the agencies believe that issuing or holding as principal crypto-assets that are issued, stored, or transferred on an open, public, and/or decentralized network, or similar system is highly likely to be inconsistent with safe and sound banking practices.”
The Federal Reserve, the FDIC, and the OCC also will “continue to engage and collaborate with other relevant authorities, as appropriate, on issues arising from activities involving crypto-assets. Banking organizations should ensure that crypto-asset-related activities can be performed in a safe and sound manner, are legally permissible, and comply with applicable laws and regulations, including those designed to protect consumers.”
Lee Reiners, Policy Director at the Duke Financial Economics Center and a former bank examiner at the New York Fed, said the comment signals that regulators don’t want banks to hold crypto on their balance sheets, excluding custodial services, as reported by Bloomberg.
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.
Source: https://www.thecoinrepublic.com/2023/01/06/the-joint-crypto-warnings-issued-by-the-us-regulators-and-fed/