Banking Regulators Release Joint Statement on Crypto Risks | Latham & Watkins LLP

Banking organizations should ensure proper risk management, but regulators are skeptical of some crypto businesses as majors.

On January 3, 2023, the Federal Reserve System (Federal Reserve) Board of Governors, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) (collectively, the agencies) issued a concise statement joint discussion on the risks of cryptocurrencies for banking organisations.

Similarly, Mark Van Der Weide, general counsel of the Federal Reserve, and Benjamin McDonough, general counsel of the OCC, made remarks to the Banking Law Committee of the Business Law Section of the American Bar Association on January 7, 2023, reiterating that their agencies would stay the course on their “careful and cautious” approach to cryptocurrencies.

Keeping in mind the safety and soundness of the U.S. banking system, the statement addresses the various risks that agencies consider associated with crypto-assets and crypto-asset industry participants. According to the statement, “banking organizations should ensure that cryptocurrency-related activities can be conducted safely and properly, are legally permissible, and comply with applicable laws and regulations, including those designed to protect consumers.”

Banking organizations should be aware of (and, where appropriate, mitigate) the following risks associated with crypto-assets:

  • Fraud and scams
  • Practices of custody, redemptions and property rights
  • Inaccurate or misleading statements and disclosures
  • False claims regarding FDIC coverage
  • Unfair, deceptive or abusive practices
  • Volatility and deposit flows
  • You run the risks associated with stablecoins
  • Contagion risks linked to the interconnectivity between market participants
  • Concentration risks due to overexposure or interconnected exposures
  • Inadequate risk management and governance practices
  • Lack of governance mechanisms for open, public or decentralized networks
  • Lack of clearly defined roles, responsibilities and obligations
  • Cyber ​​security, hacking, technology and service outages

Agencies expect these risks to be mitigated or controlled and prevented from affecting the banking system. Appropriate risk management is mandated for banking organizations to identify and manage cryptocurrency risks (including board oversight, policies, procedures, risk assessments, controls, gates and guardrails, and monitoring) .

Of particular importance to token issuers, custodians and decentralized finance protocols, the statement states that “the issuance or holding of major crypto-assets that are issued, stored or transferred over an open, public and/or decentralized network or a similar system is highly likely to be inconsistent with safe and sound banking practices.” Mr. Van Der Weide reiterated this claim in his remarks, while noting that the Federal Reserve was still considering noncore activities, such as acting as a prospector between customers and cryptocurrency companies.

In his remarks, Mr. McDonough said that the OCC’s semi-annual risk outlook report for the fall of 2022 accurately predicted three key risks that had recently emerged: that crypto risk management practices lacked maturity, that stablecoins were still susceptible to risk and that there was a high risk of contagion among industry players.

The agency’s statement closely lines up with that of the New York State Department of Financial Services (NYDFS) in its recent guidance to interested institutions engaging in (or seeking to engage in) virtual currency related activities (see this post by Latham for more information information).

The agencies note that they will continue to monitor current and emerging crypto-asset risks on the one hand and the engagement and exposure of the banking sector on the other.

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