In their first joint statement following the collapse of the crypto exchange FTX, the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) warned U.S. banks about the numerous risks associated with the crypto market.
Regulators Warn Banks about Crypto Risks
The risks highlighted by the regulators included the risk of fraud and scams among crypto sector participants, legal uncertainties related to custody procedures, redemptions, and ownership rights, significant volatility, contagion risk, as well as weak risk management and governance practices.
The regulators said it is vital to ensure that the risks in the crypto sectors that cannot be “mitigated or controlled” do not pass on to the banking system. The regulators added that they are supervising banks that may be exposed to crypto-related risks and “carefully reviewing” proposals from banks to engage in crypto activities. Overall, the regulators stated that their current understanding and experience indicate that issuing or holding crypto assets is “highly likely to be inconsistent with safe and sound banking practices.”
The warnings about potential risks associated with crypto assets clearly indicate how the collapse of Sam Bankman-Fried’s FTX has shaken the confidence of investors and regulators about the emerging asset class. While conventional banks escaped the FTX fiasco, Silvergate Capital (SI) got caught up in the storm. As per NBC News, in response to Senator Elizabeth Warren’s concerns about Silvergate’s relationship with FTX and the Bankman-Fried entities, the bank said that, like many others, “Silvergate was the victim of FTX’s and Alameda Research’s apparent misuse of customer assets and other lapses of judgment.”
Cryptocurrencies and crypto stocks plunged last year as investors shifted from risky assets to safer bets. Moreover, the FTX meltdown made matters worse. On Tuesday, Sam Bankman-Fried pled not guilty in New York Federal Court to eight criminal charges, including wire fraud, securities fraud, and money laundering. Amid all this chaos, Bitcoin (BTC-USD) has fallen more than 63% over the past year.