Regulators are warning banks that exposure to the crypto industry leaves customers at greater risk of falling victim to scams and fraud.
The Federal Reserve Board of Governors, FDIC and the Office of the Comptroller of the Currency outlined their concerns in a Jan. 3 report. Though they did not technically explicitly call on banks not to expose themselves to the industry, they said that exposure to the crypto sphere “is highly likely to be inconsistent with safe and sound banking practices.”
“The agencies have significant safety and soundness concerns with business models that are concentrated in crypto-asset-related activities or have concentrated exposures to the crypto-asset sector,” they stated. “The agencies will continue to closely monitor crypto-asset-related exposures of banking organizations.”
Regulators said that banks choosing to service the industry must be aware of the risk of scams and other fraudulent activity in the sector. They wrote that the crypto sphere is affiliated with a lack of outside oversight and risk management practices; rife with volatility; susceptible to run risk; and poses other threats to banks.
“It is important that risks related to the crypto-asset sector that cannot be mitigated or controlled do not migrate to the banking system,” they stated. “The agencies are supervising banking organizations that may be exposed to risks stemming from the crypto-asset sector and carefully reviewing any.”
The report followed a tumultuous and volatile 2022 for cryptocurrencies. In November, crypto exchange and hedge fund FTX Trading imploded. The now-bankrupt company’s founder and former owner, Sam Bankman-Fried, has been charged with numerous felonies after he allegedly defrauded investors of both FTX and its sister firm Alameda Research. Bankman-Fried was extradited in December from The Bahamas to New York City and has since pleaded not guilty. Also last year, blockchain payment platform Terra, crypto platform Voyager Digital and crypto hedge fund Three Arrows Capital also imploded.
The report also follows several other warnings government agencies have issued regarding crypto. Last fall, the Financial Stability Oversight Council found that crypto-assets could threaten the stability of the U.S. financial system without regulators enforcing current regulations and being granted more power over the space. Earlier in 2022, the Financial Stability Board found that the rapid growth of the crypto space, including its scale, increasing interconnectedness with the traditional financial system, and structural vulnerabilities, could threaten global stability.