Fed, Regulators Warn of ‘Significant’ Risks of Crypto Assets

On Tuesday, the Federal Reserve, FDIC, and OCC released a joint statement on the risks posed by crypto assets. Among other things, the statement addressed dangers to banks, such as fraud, inaccurate or misleading representations by crypto companies, and market volatility.

According to the agencies, “risks related to the crypto-asset sector that cannot be mitigated or controlled do not migrate to the banking system.” The statement said they are cautiously approaching crypto-assets due to several large crypto-asset companies’ significant risks and failures (see FTX). The Fed, FDIC, and OCC also said they are evaluating proposed crypto-asset activities and exposures at each banking organization to ensure maximum consumer protection as well as crypto compliance with existing laws.

The statement raised current concerns about cryptocurrency, including legal questions surrounding redemptions and proper crypto asset custody procedures. The statement was published shortly before disgraced FTX crypto exchange co-founder Sam Bankman-Fried, who faces over 100 years in prison if convicted, entered a not guilty plea to charges including conspiracy, wire fraud, and securities fraud.

While the agencies made a point of saying that banking “organizations are neither prohibited nor discouraged from providing banking services to customers of any specific class or type, as permitted by law or regulation,” they also stated that they “will continue to closely monitor crypto-asset-related exposures of banking organizations.”

One thing was clear, despite the equivocations: the Fed, FDIC, and OCC see decentralized systems as akin to a minefield full of peril for uninformed investors:

Heightened risks associated with open, public, and/or decentralized networks, or similar systems, including, but not limited to, the lack of governance mechanisms establishing oversight of the system; the absence of contracts or standards to clearly establish roles, responsibilities, and liabilities; and vulnerabilities related to cyber-attacks, outages, lost or trapped assets, and illicit finance.