On Tuesday, the US Federal Reserve and other regulators warned banks about the crypto market’s fraud risks, legal uncertainty, and deceptive behavior. The warning comes two months after the spectacular crash of the FTX trading platform.
The Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) said in a joint statement that they intensified the supervision of banks with business interests in digital assets. They are scrutinizing any proposals from banks to get involved in the cryptocurrency space due to concerns about the contagion risk.
The agencies stated:
“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 statement indicates that regulators are still reviewing how banks support cryptocurrencies while complying with their various duties to protect consumer rights and combat money laundering.
According to regulators, it is “likely to be inconsistent” with the safe and sound banking practices of banks that issue, hold or transfer crypto-assets on an open, public, or decentralized network.
U.S. banking regulators cautiously opposed cryptocurrency’s prominence in the traditional financial system. On November 23, 2021, the OCC stated that US banks must obtain regulatory approval before committing to crypto-related activities. In December, New York’s Department of Financial Services (DFS) said banks must notify any digital currency scheme at least 90 days before starting the activity.
Banks were also urged to act to prevent problems in the digital asset market from spilling over into the wider financial system.
The three regulators said:
“Banks should ensure appropriate risk management, including board oversight, policies, procedures, risk assessments, controls, gates and guardrails, and monitoring, to effectively identify and manage risks.”
“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 regulators said they would issue additional statements about banks’ crypto-related activities as needed and work with other institutions on crypto issues.
After the collapse of FTX, the world’s second-largest cryptocurrency exchange, the relationship between banks and crypto companies has created turmoil in the industry. The investigation into the FTX collapse has sparked major repercussions, with former FTX CEO Sam Bankman Fried accused of defrauding investors and customers.
Sam Bankman-Fried is one of the most prominent figures in the industry, known for his political connections, celebrity endorsements, and rescues of other struggling companies.
He has pleaded not guilty in a US court to allegations that he accepted customer deposits in FTX to finance his other company, Alameda Research, buy real estate and make political contributions.
Two of Bankman-Frieda’s closest associates have secretly pleaded guilty to criminal charges and are cooperating in an investigation that has rocked the entire crypto industry.
The previous year’s incidents, the collapse of FTX, and the allegations against Bankman-Fried significantly exposed the vulnerability and volatility in the cryptocurrency industry. However, US regulators have stepped in and are closely monitoring the cryptocurrency activities of banking organizations and are calling for caution regarding the risks associated with the digital market.