US regulators warn banks about crypto risk after FTX sinks

The Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC) have just issued a joint statement.

Don’t (much) touch crypto!

No new guidance or recommendations appear there, just a reminder of banks’ security obligations and a warning about their foray into the crypto realm.

Given the significant risks highlighted by the recent failures of several large crypto-asset firms, the agencies continue to take a cautious approach to current or proposed crypto-asset-related activities and exposures at any banking organization.

Statement dated January 3, 2023

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The FDIC, the insurer of US banks, is concerned about their crypto activity

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If the statement restates that banking institutions can maintain commercial relationships with crypto companies, as long as they operate in accordance with the law, however it warns against the dangers of fraud, deceit and “unfair, deceptive or abusive” practices that are rampant in this environment and that primarily harm consumers.. It also signals at the sensitivity of stablecoins to mass executions which can cause a bank execution likely to bring down the entire system. Crypto storage, a central subject if any, is also mentioned as an issue.

Litany of dangers

Issuing digital tokens or keeping them on balance is also a concern.

Based on the agencies’ current understanding and experience to date, the agencies believe that issuing or holding as primary crypto-assets that are issued, stored or transferred in an open, public and/or decentralized or similar system is too much. likely to be inconsistent with safe and sound banking practices.

Statement dated January 3, 2023

And to drive the point home, all three regulators admitted they saw “significant security and sustainability issues with business models that focus on crypto-asset-related businesses or have exposures concentrated in the crypto-asset sector. assets”.

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The legal chapter also appears clearly in the statement, in particular the uncertainty that still reigns around acquisitions and property rights. But still the interdependence of crypto companies whose demise we continue to witness. After the series of bankruptcies caused last year by the fall of Terra (Luna), it is the FTX sequence that has not yet surrendered all its corpses. The agencies indicate the risk of infection to the banks involved in the ecosystem.

It is important that risks in the crypto-asset industry that cannot be mitigated or controlled do not migrate to the banking system.

Statement dated January 3, 2023

Banking, it must be remembered, is a highly regulated sector. As such, they are highly monitored, at the national but also supranational level, with The Basel Committee on Banking Supervision, which sets international banking standards. It has also just put a cap on banks’ crypto exposure.

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Crypto exposure closed at 2% for banks

Nathalie E. – December 22, 2022 – 12:23

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