US Federal Reserve Warns Banks Of Digital Asset Risks After FTX Collapse

Key Points:

• The US Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency said they were closely observing the cryptocurrency operations of banking institutions in a joint statement on Tuesday.
• They urged financial institutions to keep an eye out for any potential fraud, legal uncertainty, and deceptive statements made by companies dealing in digital assets.

In a joint statement, the Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC) underlined vulnerabilities they perceive in the crypto industry and reminded banks of their safety and soundness requirements.

The regulators highlighted a few red flags for those wishing to go deeper into crypto-related activities, even if the statement noted that banks aren’t forbidden from doing business with organizations that operate within the law.

The statement was sent following a turbulent year for cryptocurrencies that, in the opinion of detractors, exposed potential systemic flaws. The algorithmic stablecoin TerraUSD, which was purportedly tied to the value of the US dollar, crashed last year.

Federal prosecutors claim that the defunct cryptocurrency trading site FTX was corrupt from the start and was promoted as the entry point for cryptocurrencies into the public. These well-publicized failures, together with falling prices and lingering concerns about the security of decentralized finance platforms, have plunged cryptocurrencies into what the market refers to as a “crypto winter.”

The list of dangers underlined the possibility of fraud, swindles, and dishonest business practices, as well as stablecoins’ vulnerability to bank runs. Concerning factors mentioned in the statement include ambiguous redemption rights and unclear custody procedures for cryptocurrency enterprises.

“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,” according to the statement from agencies.

Recently, regulators have tried to enact investor safeguards through actions like President Joe Biden’s executive order from March and federal agency recommendations to stop the unauthorized use of digital assets.

The U.S. Financial Stability Oversight Council, which is comprised of the heads of all significant federal financial regulatory agencies and is chaired by Treasury Secretary Janet Yellen, unanimously approved a report in October that found that activities involving crypto-assets pose stability risks if trading is allowed to expand without additional regulation.

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