WASHINGTON– Three banking regulators have issued a joint statement on the risks of crypto assets on banking organizations.
In the statement, the Federal Reserve, the FDIC and the Office of the Comptroller of the Currency said the events of the past year have been marked by “significant volatility and the exposure of vulnerabilities in the crypto-asset sector.”
According to the agencies, those events highlight a number of key risks associated with crypto-assets and crypto-asset sector participants that banking organizations should be aware of, including:
- Risk of fraud and scams among crypto-asset sector participants.
- Legal uncertainties related to custody practices, redemptions, and ownership rights, some of which are currently the subject of legal processes and proceedings.
- Inaccurate or misleading representations and disclosures by crypto-asset companies, including misrepresentations regarding federal deposit insurance, and other practices that may be unfair, deceptive, or abusive, contributing to significant harm to retail and institutional investors, customers, and counterparties.
- Significant volatility in crypto-asset markets, the effects of which include potential impacts on deposit flows associated with crypto-asset companies.
- Susceptibility of stablecoins to run risk, creating potential deposit outflows for banking organizations that hold stablecoin reserves.
- Contagion risk within the crypto-asset sector resulting from interconnections among certain crypto-asset participants, including through opaque lending, investing, funding, service, and operational arrangements. “These interconnections may also present concentration risks for banking organizations with exposures to the crypto-asset sector,” the agencies stated.
- Risk management and governance practices in the crypto-asset sector exhibiting a lack of maturity and robustness.
- Heightened risks associated with open, public, and/or decentralized networks, or similar systems, including, but not limited to, the lack of governance mechanisms establishing oversight of the system; the absence of contracts or standards to clearly establish roles, responsibilities, and liabilities; and vulnerabilities related to cyber-attacks, outages, lost or trapped assets, and illicit finance.
What’s Important
“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 said, adding that given the significant risks highlighted by recent failures of several large crypto-asset companies, they will continue to take a “careful and cautious” approach related to current or proposed crypto-asset-related activities and exposures at each banking organization.
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