On Tuesday, U.S. banking regulators warned that dealing with cryptocurrency exposes financial institutions to a number of risks, including scams and fraud. “The events of the past year have been marked by significant volatility and the exposure of vulnerabilities in the crypto-asset sector,” the regulators said in a joint statement from the Federal Reserve, Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency. The comments come just weeks after the spectacular collapse of the crypto exchange FTX. The regulators said the risks include: “fraud and scams among crypto-asset sector participants” and “contagion risk within the crypto-asset sector resulting from interconnections among certain crypto-asset participants.” During the crypto boom, when financial players seemed to announce new crypto partnerships on a weekly basis, bank executives indicated they needed more guidance from regulators before dealing more directly with bitcoin and other cryptocurrencies in retail and institutional trading businesses. Now, about two months after the bankruptcy filing of FTX, the industry has been exposed as rife with poor risk management, interconnected risks, and outright fraud.
While the statement indicated that regulators were still assessing how banks could adopt crypto while adhering to their various consumer protection and anti-money laundering mandates, they seemed to give a clue as to which direction they were headed. “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 decentralized network, or similar system is highly likely to be inconsistent with safe and sound banking practices,” the regulators said. They also said they have “significant safety and soundness concerns” about banks that focus on crypto clients or have “concentrated exposures” to the sector. Traditional banks have largely sidestepped the crypto meltdown, unlike the 2008 financial crisis in which they played a central role. One exception is Silvergate Capital, whose shares have been battered in the past year.