US regulators warn banks of cryptocurrency ‘contagion risk’ after FTX

Federal bank regulators warned banks against investing in cryptocurrencies this week, in what could be a prelude to more aggressive regulations to come.

The guidance comes after the recent “failures of several major cryptocurrency companies,” according to a press release issued by the Federal Reserve, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency.

Not mentioning the recent implosion of cryptocurrency exchange FTX by name, regulators have said that, due to poor oversight, cryptocurrency firms pose a “contagion risk” to banks. They cited other concerns as well, such as fraud or scams, legal uncertainties over the custody of crypto assets, and misleading claims by crypto firms.

Is there more regulation of cryptocurrencies on the way?

While regulators have warned that “risk management and governance practices” in the crypto space lack “maturity and robustness,” they stopped short of announcing new rules or regulations for banks that invest in cryptocurrencies. They have not even discouraged partnerships between banks and crypto companies.

The agencies said they would take a “careful and cautious approach” to “cryptocurrency-related assets and exposures” at each bank.

“The statement is a bit ominous in regards to the riskiness of cryptocurrencies, with no advice on how to deal with it,” says David Schwed, chief operating officer at blockchain security firm Halborn. “However, it demonstrates that federal regulatory agencies are actively involved in helping restore stability to markets.”

While the regulators’ warning “sheds light on many of the risks associated with digital assets,” Schwed thinks it’s “nothing more than a high-level generalized risk warning.”

After the collapse of FTX, the White House has called for increased regulation of cryptocurrencies, as has crypto enthusiast and celebrity investor Kevin O’Leary.

Much more needs to happen when it comes to regulation, Schwed adds, but this year “nothing radical” is expected.

The upshot of the statement is that banks will need to be cautious when considering cryptocurrency investments, says Mina Tadru, CEO of investment firm Tadrus Capital.

“This notice could make more regulation of cryptocurrency investments more likely in the future,” says Tadru. Those regulations could include increased reporting and capital requirements, as well as limits on the types of investments banks can make in cryptocurrencies.

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