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U.S. authorities caution financial institutions to be more vigilant against crypto-related contagion risks

Federal Reserve, FDIC, and OCC warn banks about crypto hazards. “The agencies have serious safety and soundness concerns about crypto-asset-related business models,” authorities said.

Just two months after the failure of the cryptocurrency exchange FTX shocked the global financial community, regulators in the United States issued a warning on Tuesday that banks should exercise greater caution regarding the risks of fraud, legal uncertainty, and misleading disclosures by crypto firms. The Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) both said that they have safety and soundness concerns with bank business models that are primarily focused on cryptocurrency.

According to their explanation, the events that took place over the course of the previous year demonstrated “substantial volatility and the disclosure of weaknesses in the crypto-asset industry.” The authorities have identified a wide variety of threats, including as fraudulent activities and frauds, legal ambiguities, false or deceptive statements made by cryptocurrency firms, huge price swings across cryptocurrency marketplaces, run risks, and contagion risks. According to the joint statement, “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 joint statement emphasizes.

The regulators added that banks that issue or hold cryptocurrency tokens that are stored on public, decentralised networks are “highly likely” to be inconsistent with safe and sound banking practises. This could deal a blow to several lenders’ ongoing efforts to provide cryptocurrency services to customers.

Banking organizations should ensure appropriate risk management, including board oversight, policies, procedures, risk assessments, controls, gates and guardrails, and monitoring, to effectively identify and manage risks.

The statement reads

This statement comes after authorities have been hesitant for months to give universal guidelines or regulations on cryptocurrency, even though banks have voiced a need for greater clarity in the matter. While the OCC has stated in the past that banks are required to obtain regulatory approval before engaging in certain crypto-related activities, such as holding tokens on behalf of clients, the Fed has instructed banks to notify their supervisors before moving forward with any efforts involving crypto.

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 regulators said

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