US regulators warn banks over crypto risks

The Federal Reserve, FDIC and OCC have issued an unprecedented joint warning to tyhe nation’s banks after the collapse of FTX

US Banks                                 
Banks in the United States have been told to ensure that they have appropriate risk management processes – Photo: Shutterstock
                                

Three US regulators have issued their first ever joint warning to American banks over the risks posed by crypto assets. 

In a statement, the US Federal Reserve, Office of the Comptroller of the Currency and Federal Deposit Insurance Corporation told the nation’s banking organisations that the events of the past year had highlighted “a number of key risks associated with crypto-assets.”

The total capitalisation of the cryptocurrency market fell by two thirds, from $2.2trn to $794bn in 2022, as investors cycled out of more speculative assets and central banks raised interest rates to combat runaway inflation.

The decline was exacerbated by a number of high-profile collapses, frauds and bankruptcies, most notably the disintegration of FTX. 

Among the many risks associated with the once-burgeoning sector, the agencies highlighted the “risk of fraud and scams among crypto asset sector participants”, the “susceptibility of stablecoins to run risk”, and “inaccurate or misleading representations and disclosures by crypto asset companies”. 

The statement warned of the interconnections between certain market participants, which “present concentration risks for banking organisations with exposures to the crypto-asset sector.”

It continued: “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 told banks to ensure that they have appropriate risk management processes, including board oversight procedures, risk assessments, gates and guardrails “to effectively identify and manage risks.”

On Tuesday, FTX’s founder Sam Bankman-Fried appeared in court in New York for the first time and pleaded not guilty to claims that he took customer deposits from FTX in order to fund his other firm, Alameda Research, to make political donations and to purchase properties. 

If found guilty, the 30-year old could face up to 100 years in prison.

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