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U.S Agencies warns banks of crypto-related risks

U.S agencies have warned banking organizations on the risks associated with crypto and mentioned efforts to ensure a safe environment for the banks and its customers.

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Following the 2022 crypto events, the agencies said “the events of the past year have been marked by significant volatility and the exposure of vulnerabilities in the crypto-asset sector.” Therefore, the agencies warned banking organizations about the obvious risks of crypto and specifically stated that crypto-related risks that cannot be controlled do not breeze into the banking system. “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 agencies stated. 

The agencies include the Federal Reserve System (Federal Reserve), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).

In a document published by the Board of Governors of the agencies, crypto risks banking organizations should be aware of were highlighted. Highlighting the risks, the document referenced recent failures of several large crypto-asset companies. The risks highlighted formed the basis of the cautious approach the agencies are taking regarding crypto-related activities proposed by banking organizations.  As contained in the document, the risks banking organizations should be aware of include:

  • Fraud and scams. 
  • Legal uncertainties related to custody practices, redemptions, and ownership rights.
  • Inaccurate or misleading representations and disclosures by crypto-asset companies. 
  • Significant volatility in crypto-asset markets. 
  • Susceptibility of stablecoins to run a risk, creating potential deposit outflows for banking organizations that hold stablecoin reserves. 
  • Contagion risk within the crypto-asset sector.
  • Risk management and governance practices in the crypto-asset sector exhibit a lack of maturity and robustness. 
  • Heightened risks associated with open, public, and/or decentralized networks.

Regarding the efforts made by the agencies, supervisions and reviews are being carried out on banking organizations likely to be impacted by crypto-related risks. The review involves a careful evaluation of “proposals from banking organizations to engage in activities that involve crypto-assets.” Part of the evaluation is that the agencies will continue to assess how crypto-asset-related activities proposed by banking organizations can be carried out in an environment that will ensure customer and bank safety and legal.

Also, “the agencies continue to build knowledge, expertise, and understanding of the risks crypto-assets may pose to banking organizations, their customers, and the broader U.S. financial system.”

According to the document, “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.” 

A new development in line with the evaluation of proposals by the agencies involves processes where banking organizations have access to supervisory discussions on proposed and existing crypto-asset-related activities. Further, the agencies said it will issue additional statements on engaging with crypto-asset-related activities by banks, if necessary.  

The agencies also will continue to engage and collaborate with other relevant authorities, as appropriate, on issues arising from activities involving crypto-assets. 

Read also; 

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