U.S. regulators issue post-FTX collapse crypto warning to banks

U.S. banking regulators remain skeptical of banks holding digital assets. 

The Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. put out a joint statement that reminded banks of their safety and soundness obligations and outlined risks they see in the cryptocurrency sector. Though the statement noted that banks aren’t prohibited from doing business with companies that operate within the law, the regulators raised several red flags for those hoping to dive deeper into crypto-related activities. 

The list highlighted risks that include the potential for fraud, scams and deceptive practices, in addition to the susceptibility of stablecoins to bank runs.  The statement also named issues such as uncertain redemption rights and unknown custody practices at crypto businesses as areas of concern.

“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 agencies wrote. “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.”

The bank regulators also warned against business models that concentrate on “crypto-asset-related activities or have concentrated exposures to the crypto-asset sector.”

Bank relationships with crypto firms have come under additional scrutiny after FTX’s high-profile collapse, which was caused by a run on the exchange’s utility token FTT, which Alameda Research, the crypto exchange’s closely-affiliated investment fund, used as collateral for loans. California-based Silvergate Bank, which does significant business with stablecoin issuers and counted FTX as a client, has come under particular focus, as has Moonstone Bank, a Washington state-based bank that received investment from Alameda Research. 

The warning statement followed similarly-toned public remarks from Fed Vice Chair of Supervision Michael Barr and recently-confirmed FDIC Chair Martin Gruenberg. 

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