Three US federal banking supervisory authorities have issued a joint statement calling attention to the risks of cryptocurrency exposure to banking organizations.
The statement issued by the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency describes the key risks associated with cryptocurrencies and the cryptocurrency sector, given the significant volatility and vulnerabilities of the past year.
For anyone who follows cryptocurrencies or has ever seen a news story about FTX, it is obvious that 2022 was a pretty tumultuous year for cryptocurrencies. The biggest problem for the broader crypto market is that it is full of fraudsters, and the joint statement was basically motivated by this, writes Silicon Angle.
The joint statement highlights the risks facing banking organizations when they participate in crypto. While the agencies are not banning banks from doing business with crypto asset owners and companies, they are suggesting they should avoid crypto altogether.
Among the risks listed in the statement is the risk of fraud and scams among users of crypto-assets. In second place are legal uncertainties related to escrow practices, redemptions and ownership rights, some of which are “currently the subject of legal processes and procedures.”
The third warning points to inaccurate or misleading statements and disclosures by companies that market cryptocurrency assets. These include federal deposit insurance misrepresentations and other practices that may be unfair, deceptive or abusive and cause significant harm to retail and institutional investors, customers and partners.
The fourth warning is “significant volatility in crypto-asset markets, the effects of which include potential effects on deposit flows related to crypto-asset companies.” If the FDIC prohibits conversion of US dollars into South American currencies, which sometimes have the same problem, then this point may be taken more seriously.
Stablecoins’ “sensitivity to run risk, causing potential deposit outflows for banking institutions holding stablecoin reserves” is next on the list. The purpose of so-called stablecoins is to be tied to physical assets, usually US dollar reserves. But back to the fact that the cryptocurrency business is full of scammers, one supposedly dollar-pegged stablecoin after another has failed over the past few years.
The joint statement warns of the risk of contagion within the crypto-currency industry arising from entanglements between some crypto-currency industry participants, including through opaque lending, investment, financing, service and operating arrangements. Without naming FTX, the text refers to the relationship between FTX and Alameda Research.
Despite the rise of venture capital-backed and sometimes public crypto companies, the statement goes on to warn that risk management and governance practices in the cryptoasset industry are not mature and robust enough.
Finally, the joint statement states that there are increased risks associated with open, public or decentralized networks and similar systems. Risks include a lack of governance mechanisms to oversee the system, a lack of contracts or standards that clearly define roles and responsibilities, and a range of vulnerabilities related to cyber attacks, outages, lost or trapped assets, and illicit financing.
“It is important that unmitigated or uncontrollable risks related to the crypto-asset sector do not migrate into the banking system. The agencies supervise banking entities that may be exposed to risks arising from the crypto-asset sector and scrutinize banking entities’ exposure to cryptocurrency -proposals to participate in activities involving assets,” warns the joint statement, which clearly wants to ensure that crypto is avoided by the banks they regulate, even if this activity is not illegal.