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Regulatory agencies have issued a warning to banks that are dabbling in cryptocurrency. 

Three US federal banking regulatory agencies have issued a joint statement highlighting the risks to banking organizations of exposure to cryptocurrencies.
A statement released yesterday 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 key risks associated with cryptocurrencies and the crypto-asset sector, “as evidenced by significant volatility and vulnerabilities over the past year.”

Anyone who follows cryptocurrencies or has ever seen a news story about FTX—curious New York Times posts aside—knows that 2022 was not a great year for cryptocurrency. Hating cryptocurrencies became a thing shortly after bitcoin was created, but the biggest problem with the broader crypto market is that it’s full of scammers, and that’s the broad motivation behind the joint statement.

The joint statement outlines the risks that cryptographic activities pose to banking organizations. While the agencies are not banning banks from conducting transactions with crypto holders and companies, they should avoid using crypto altogether.

 

fed warning to banks
Key risk associated with crypto-assets and crypto-asset sector participants that banking organizations should be aware

The exposure of stablecoins to “the risk of possible deposit outflows to banking organizations with stablecoin reserves” is next on the list. So-called stablecoins are designed to be tied to physical assets, usually US dollars. But, returning to the fact that the cryptocurrency industry is rife with con artists, one purported stablecoin tied to the US dollar has fallen by the wayside in recent years.

The joint statement warns of the risk of contagion in the crypto sector due to the relationships between some crypto participants, including opaque lending, investing, financing, servicing, and operational arrangements. In related news, FTX founder Sam Bankman-Fried has pleaded guilty to multiple charges filed in New York. 

Without naming FTX, the passage refers to the relationship between FTX and Alameda Research.
Despite the rise of private equity and sometimes public crypto companies, the statement warns that risk management and governance practices in the crypto asset industry lack maturity and strength.

Finally, the joint statement affirms that open, public, or decentralized networks or similar systems entail greater risks. Risks include a lack of governance mechanisms to monitor the system, a lack of agreements or standards that clearly define roles, responsibilities, and accountabilities, and vulnerability to cyberattacks, outages, lost or seized funds, and illegal financing.

“It is important that risks associated with the crypto-asset sector, which cannot be hedged or managed, are not transferred to the banking system,” the joint statement warned. “The agencies monitor banking organizations that may be exposed to risks from the crypto-assets sector and carefully review the proposals of banking organizations to engage in activities involving crypto-assets.”

Despite the current claim that it’s clear as day that the three agencies are warning banks to avoid using crypto, it’s kind of a no-go.
“Banking organizations are neither prohibited nor encouraged to provide banking services to any specific class or type of customer as permitted by law or regulation,” according to the statement.”

The agencies will continue to evaluate whether and how the current and proposed crypto asset activities of banking organizations can be conducted in a manner that appropriately considers safety and soundness, consumer protection, legal authorization, and compliance with applicable laws and regulations, including money laundering and illegal activities.”

The joint statements of the three federal agencies are a clear warning that the very banks they regulate should avoid crypto. A few years ago, banks banned crypto, even refusing to transfer money to crypto accounts. While the statement doesn’t necessarily mean those days will return, it’s an interesting coincidence that the statement comes after the United Nations called for encryption bans in August.

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