Crypto Regulatory Affairs: US Supervisors Warn Banks on Crypto Exposure

By: David Carlisle (Elliptic)

US banking regulators have kicked off 2023 with a stern warning for banks to tread carefully when it comes to crypto. 

On January 3rd, US federal banking supervisors issued a “Joint Statement on Crypto-Asset Risks to Banking Organizations”. The statement – released by the Federal Reserve Board (FRB), Office of the Comptroller of the Currency (OCC) and Federal Deposit Insurance Corporation (FDIC) – warns banks of the need to ensure that risks from the crypto sector don’t spill over into the banking world. 

The statement appears to have been prompted, at least in part, by the string of crypto market crises that occurred across 2022. While the guidance does not mention FTX, Terra/UST, or any of the other crypto crises of the past year by name, it does state that: “The events of the past year have been marked by significant volatility and the exposure of vulnerabilities in the crypto sector. These events highlight a number of key risks associated with cryptoassets and cryptoasset sector participants that banking organizations should be aware of.”

The statement goes on to identify a number of risks – such as fraud, financial crime, cybersecurity, run risks, legal uncertainties and others – that banks can face where they offer cryptoasset services, or through exposure to cryptoasset businesses. 

It explains that banks are not prohibited from engaging in crypto-related activities or with the crypto sector. However, it adds that: “It is important that risks related to the cryptoasset sector that cannot be mitigated or controlled do not migrate to the banking system.” The statement also underscores that banks must be able to demonstrate that they mitigate the risks of any crypto-related activities they undertake before doing so. 

The Joint Statement is just the latest in a string of actions from regulators and global watchdogs seeking to ensure that banks’ exposure to crypto is manageable. In December, the Basel Committee on Banking Supervision issued guidance clarifying prudential standards for banks that hold cryptoassets. The same month, the New York Department of Financial Services (NYDFS) released guidance similar to the Joint Statement, reminding banks in New York that they must obtain regulatory approval before undertaking crypto-related activities. In late 2021, the OCC had also told banks that they must obtain approval before engaging in services such as crypto custody, or stablecoin issuance. 

To date, regulators have largely been of the view that risks in the crypto sector are unlikely to have widespread systemic impact on the banking sector, or on broader financial market stability. However, some regulators fear that with time, the risks of crypto market contagion spilling into the banking sector could become an increasingly significant problem…

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