Banking regulators in the U.S. have warned financial institutions to be careful about how they deal with cryptocurrency, noting that it exposes them to risks such as scams and fraud.
This warning is coming after the FTX collapse and the bankruptcy of several crypto platforms, which has negatively impacted the crypto industry and has led to the high volatility of crypto assets.
The regulators said in a joint statement, from the Federal Reserve, Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency, “The events of the past year have been marked by significant volatility and the exposure of vulnerabilities in the crypto-asset sector”.
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The regulators further disclosed that there is a heightened case of fraud and scams among crypto-asset sector participants and contagion risk within the crypto-asset sector resulting from interconnections among certain crypto-asset participants.
In the statement, the regulators also highlighted various shortcomings that have rocked the crypto industry lately such as the Risk of fraud and scams among crypto-asset sector participants, Legal uncertainties related to custody practices, redemptions, and ownership rights, some of which are currently the subject of legal processes and proceedings.
Also, it revealed that inaccurate or misleading representations and disclosures by crypto-asset companies, including misrepresentations regarding federal deposit insurance, and other practices that may be unfair, deceptive, or abusive, have contributed to significant harm to retail and institutional investors, customers, and counterparties.
Also, the susceptibility of stablecoins to run risk creates potential deposit outflows for banking organizations that hold stablecoin reserves.
Given the significant risks highlighted by the recent failures of several large crypto-asset companies, the U.S. banking regulators have continued to take a careful approach related to current or proposed crypto-asset-related activities and exposures at each banking organization.
However, Banking organizations are neither prohibited nor discouraged from providing banking services to customers of any specific class or type, as permitted by law or regulation.
The regulators will continue to assess whether or how current and proposed crypto-asset-related activities by banking organizations can be conducted in a manner that adequately addresses safety and soundness, consumer protection, legal permissibility, and compliance with applicable laws and regulations, including anti-money laundering and illicit finance statutes and rules.
They have further warned financial institutions that holding crypto-assets that are issued, stored, or transferred on an open, public, or decentralized network is highly likely to be inconsistent with safe and sound banking practices.
Recall that last year, the crypto industry was shaken by different unpleasant happenings around several crypto platforms. The major one that shook the crypto industry was the bankruptcy of the FTX, which filed for chapter 11 bankruptcy on November 11, 2022, and its banking ties have raised uncomfortable questions for regulators.
The collapse of FTX left more than one million customers unable to withdraw assets worth an estimated $8bn.
Prosecutors allege the company’s CEO Sam Bankman-Fried used FTX’s customers’ money to cover losses in his private crypto hedge fund Alameda Capital in what the company’s new chief executive disclosed as an “old-fashioned embezzlement”.
Reports reveal that an estimate of 80,000 FTX’s customers are based in the UK, with individual liabilities as high as £5m in life savings according to a lawyer acting for dozens of victims.
This led the Bank of England deputy governor Jon Cunliffe to disclose that the FTX collapse shows crypto is ‘too dangerous’ not to regulate, further stating that Cryptocurrency trading is “too dangerous” to remain outside mainstream financial regulation and could pose “a systemic problem” without action.
This has also spurred the U.S. banking regulators to continue to closely monitor crypto-asset-related exposures of banking organizations.
As warranted, the agencies will issue additional statements related to engagement by banking organizations in crypto-asset-related activities.
They will also continue to engage and collaborate with other relevant authorities, as appropriate, on issues arising from activities involving crypto-assets.