For the first time ever, US regulators have issued a joint advisory to banks on the risks associated with cryptocurrencies, following the massive bankruptcies of several major cryptocurrency firms.
Worried about cryptocurrency’s place in the banking sector, three American regulators – the Federal Reserve Bank (EDF), the Federal Deposit Insurance Company (FDIC) and theOffice of the Comptroller of the Currency (OCC) – released a joint statement on the risks of crypto-assets for banking institutions.
They specifically stated the following,
“Last year’s events were marked by significant volatility and exposure of vulnerabilities in the cryptocurrency industry. These events highlight a number of key risks associated with crypto-assets and industry players. Banking organizations need to know this.”
The “key risks” in question include:
- scams and frauds,
- legal uncertainties relating to property rights, custody and reimbursement practices,
- significant volatility,
- lack of maturity and robustness in terms of risk management and governance practices,
- the risks associated with open, public and/or decentralized networks,
- the susceptibility of stablecoins to the “bank run”,
- and contagion risk arising from interconnectedness among some participants, especially through “opaque arrangements in loans, investments, finance, services and transactions”, which may also present concentration risks for banking organizations exposed to the sector.
The fear of regulators lies in the possibility that the risks of the cryptocurrency sector that cannot be controlled or mitigated will migrate to the banking sector. As a result, regulators say the industry is now under increased scrutiny:
The agencies monitor banking organizations that may be exposed to risks posed by the crypto-asset industry and carefully review any plans by these organizations that involve significant engagement in crypto-related activities.”
The “cautious and careful approach” taken by the agencies in this regard is motivated by the recent bankruptcies of several major cryptocurrency companies.
And though he’s not mentioned by name, FTP extension it is definitely one of those companies. The implosion of the stock exchange and its subsidiary Research Alameda last November sent huge shockwaves through the cryptocurrency industry and beyond. Their impact continues to be felt as new information emerges on an almost daily basis.
No formal bans in place
And while nothing prohibits or discourages banking organizations from providing banking services to customers of “any specific category or type, as indicated by law or regulation,” regulators said that:
“The issuance or proprietary holding of crypto-assets that are issued, stored or transferred over an open, public and/or decentralized network, or similar system, is most likely inconsistent with safe and sound banking practices. Additionally, agencies have significant security and robustness issues with business models that dominate cryptocurrency-related businesses or have significant exposure to the cryptocurrency industry.”
That said, regulators will monitor all exposures of banking organizations related to crypto-assets and issue further statements on this issue as needed, the statement said.
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