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U.S. Regulators Address Unclear Crypto Path in Warning to Banking Industry

Several top U.S. regulatory agencies collaborated on a message to the banking industry as the uncertain fate of the crypto space continues to captivate government officials, consumers and investors.  

As such, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation issued a statement last week highlighting areas of particular concern. The letter addressed “significant volatility and vulnerabilities” specifically obvious during the past year.

In recent weeks, the arrest and trial of FTX founder Sam Bankman-Fried has gained international attention as the embattled crypto mogul has been accused of mishandling billions of dollars in assets. Bankman-Fried pleaded not guilty to several fraud-related charges and is expected to go to trial in October.

“The events of the past year have been marked by significant volatility and the exposure of vulnerabilities in the crypto-asset sector. These events highlight a number of key risks associated with crypto-assets and crypto-asset sector participants that banking organizations should be aware of,” reads the letter.

According to the agencies, they will continue to assess cryptocurrency-related activities taking place in the banking industry, and will assess if those activities can, in fact, “be conducted in a manner that is safe and sound, legally permissible, and in compliance with applicable laws and regulations.” To that end, the regulators will pay close attention to relevant consumer protection rules.

From Twitter

BankThink @BankThink (Dec 31, 2022)

"The FTX collapse and other recent disasters in the cryptocurrency space show that there is an urgent need for oversight. Writing in @AmerBanker @BankThink, @endotech_algo co-founder Dmitry Gooshchin argues for a self-regulatory model. https://www.americanbanker.com/opinion/we-cant-afford-to-wait-for-government-to-lead-crypto-regulation"

“It is important that risks related to the crypto-asset sector that cannot be mitigated or controlled do not migrate to the banking system,” reads the letter. “The agencies are supervising banking organizations that may be exposed to risks stemming from the crypto-asset sector and carefully reviewing any proposals from banking organizations to engage in activities that involve crypto-assets.”

Among the specific areas of concern, per the agencies, are:

  • The risk of scams and fraud from participants
  • Legal uncertainties pertaining to ownership rights, custody practices and redemptions
  • Misleading or inaccurate disclosures coming from asset companies, including information regarding deposit insurance
  • Market volatility
  • Run risks for stablecoin holders
  • “Contagion risk” coming from a growing interconnectedness in the crypto-asset sector

The direction of cryptocurrency legislation in 2023 will depend, in part, on how aggressively the newly installed Republican House majority pursues legislative solutions. Considering fragmentation in the House between moderate and conservative Republicans, there are plenty of questions about what agenda will come out of the disarray.

From Twitter

Brad Garlinghouse @bgarlinghouse (Jan 3, 2023)

"Today is the first day of the 118th Congress. While prior efforts at regulatory clarity for crypto in the US have stalled, I am cautiously optimistic that 2023 is the year we will (finally!) see a breakthrough. A thread on why…"

The regulatory agencies said they will actively monitor the issue and update principal stakeholders as needed.

“The agencies … will continue to engage and collaborate with other relevant authorities, as appropriate, on issues arising from activities involving crypto-assets,” adds the letter.

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