Federal Reserve, Top Bank Regulators Report “Significant” Concerns Over Cryptocurrencies

The Federal Reserve, the FDIC and the Office of the Comptroller of the Currency (OCC) released a joint statement on Tuesday warning of the “significant” risks cryptocurrencies could pose to the broader banking system.

“It is important that cryptocurrency-related risks that cannot be mitigated or controlled do not migrate to the banking system,” the agencies said in a joint statement.

“Given the significant risks highlighted by the recent bankruptcies of several major cryptocurrency companies, agencies continue to adopt a careful and cautious approach in relation to current or proposed cryptocurrency assets and exposures at each banking organization.”

Regulators are warning banks about a long list of risks when it comes to cryptocurrencies, including fraud, volatility, risk mismanagement, and contagion within the cryptocurrency industry.

Agencies have also reported legal uncertainties when it comes to refunds, ownership rights, and custody practices for cryptocurrencies.

Tuesday’s statement came minutes before Sam Bankman-Fried, co-founder and former CEO of bankrupt cryptocurrency exchange FTX, pleaded not guilty to eight counts of wire fraud, securities fraud and conspiracy.

Bankman-Fried faces up to 115 years in prison for his alleged role in the most high-profile cryptocurrency crash to date.

Former FTX chief executive Sam Bankman-Fried, who faces fraud charges over collapse of bankrupt cryptocurrency exchange, quits following a hearing in federal court in Manhattan in New York City, United States, 3 January 2023. REUTERS/Andrew Kelly

Former FTX chief executive Sam Bankman-Fried, who faces fraud charges over collapse of bankrupt cryptocurrency exchange, quits following a hearing in federal court in Manhattan in New York City, United States, 3 January 2023. REUTERS/Andrew Kelly

“Inconsistent with safe and sound banking practices”

While regulators are still studying whether or how banks can incorporate cryptography into their operations in a secure way that protects consumers, the trifecta of regulators say that issuing or holding cryptocurrencies that are issued, stored, or transferred over an open network , public or decentralized is “inconsistent”. with sound and safe banking practices.

“Based on the agencies’ current understanding and experience to date, the agencies believe that issuing or holding major crypto-assets issued, stored, or transferred over an open, public, and/or decentralized network or similar system is highly likely to be inconsistent with safe and sound banking practices,” the statement read.

“Furthermore, agencies have significant security and robustness issues with business models that are concentrated in cryptocurrency-related businesses or have exposures concentrated in the cryptocurrency sector.”

The agencies are overseeing banks that may be exposed to cryptocurrency industry risks and are reviewing any proposals by banks to engage in crypto assets.

The OCC has put in place rules that require banks to seek permission in order to engage in any cryptographic activity. The Acting Comptroller of the Currency, Michael Hsu, likened cryptocurrencies to derivatives in the early 2000s, warning of the risk of contagion with cryptocurrencies and saying the industry’s growth was driven by hype.

The Financial Stability Oversight Council is watching cryptocurrency markets closely, but has yet to deem crypto assets systemic.

A few bills have been proposed in Congress to regulate cryptocurrencies, although it will take some time for the legislation to reach the finish line.

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