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US bank watchdogs issue joint warning on crypto activities

US bank watchdogs issue joint warning on crypto activities
The Marriner S Eccles Federal Reserve building in Washington, DC, on Friday, 17 September 2021.

The top US bank regulators issued a fresh warning to lenders about the risks associated with delving into crypto.

The Federal Reserve, Federal Deposit Insurance Corp and the Office of the Comptroller of the Currency on Tuesday detailed concerns with the volatile asset class. Officials said in a statement that it was important that risks that can’t be controlled aren’t allowed to migrate to the banking system. 

“The events of the past year have been marked by significant volatility and the exposure of vulnerabilities in the crypto-asset sector,” the agencies said. 

The warning follows a particularly fraught period for crypto. The collapse in November of the FTX exchange has left customers around the world facing the potential of billions of dollars in losses.

Federal watchdogs have insisted that the impact on the broader financial system from FTX’s implosion was minimal. However, it has kindled calls for American regulators to do more to prevent further calamities. 

“It is important that risks related to the crypto-asset sector that cannot be mitigated or controlled do not migrate to the banking system,” the regulators said. 

The watchdogs said they would continue “to take a careful and cautious approach related to current or proposed crypto-asset-related activities and exposures at each banking organisation.”

Some of the risks that the regulators identified include:

  • Fraud and scams.
  • Legal uncertainties around custody.
  • Misleading statements by crypto firms.
  • Contagion within the crypto sector.

Although Wall Street has been slow to embrace crypto, the FTX collapse has exposed how some smaller US banks have got involved in the sector. For example, the firm listed in bankruptcy filings Silvergate Capital Corp. and Signature Bank, which are both federally regulated, as places where it or related entities had accounts. Both firms have said that deposits related to the exchange represented a very small percentage of their overall deposits. 

On Tuesday, Signature Bank said that it supported regulators’ focus on crypto and that it has been taking steps to significantly reduce deposit concentrations related to crypto clients and others. “We do not lend in this space, nor do we trade, invest or custody crypto assets,” the firm said. Silvergate declined to comment on the joint statement from the watchdogs. 

In October, Bank of New York Mellon Corp. announced the launch of a digital asset platform in the US to allow some clients to hold and transfer Bitcoin and Ether. The firm declined to comment on the regulators’ statement. 

The watchdogs on Tuesday took particular issue with what they said were business models that had concentrated exposure to the sector. “Based on the agencies’ current understanding and experience to date, the agencies believe that issuing or holding as principal crypto-assets that are issued, stored, or transferred on an open, public, and/or decentralised network, or similar system is highly likely to be inconsistent with safe and sound banking practices,” the agencies said. 

Lee Reiners, policy director at the Duke Financial Economics Centre and a former bank examiner at the New York Fed, said the comment signals that regulators don’t want banks to hold crypto on their balance sheets, excluding custodial services. 

Still, officials stopped short of announcing any additional rules, or a further crackdown on the sector. They also didn’t mention any firms by name. 

“I find the response inadequate given what we’ve learned about the extent of fraud, misuse of customer assets and other misconduct,” said Arthur Wilmarth, professor emeritus at George Washington University Law School. “I would expect them to have a higher sense of alarm about this whole area.”

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