Could the banking industry decide to exclude cryptocurrency?

For the first time, US regulators have jointly warned banks about the risks associated with cryptocurrencies following the massive bankruptcy of several major crypto companies.

Three American regulators concerned about the place of cryptocurrency in the banking sector – the Federal Reserve Bank (EDF), the Federal Deposit Insurance Corporation (FDIC) andOffice of the Comptroller of the Currency (OCC) – issued a joint statement on the risks of crypto-assets for banking institutions.

In particular, they stated the following:

“The events of the past year have been marked by significant volatility and exposure of vulnerabilities in the crypto-asset industry. These events highlight a number of key risks related to crypto-assets and industry players. Banking institutions should be aware.”

These “main risks” include:

• fraud and swindling,
• legal uncertainties regarding ownership rights, storage practices and returns,
• significant variability,
• lack of maturity and robustness in terms of risk management and governance practices;
• risks associated with open, public and/or decentralized networks;
• the susceptibility of stablecoins to a “bank run”,
• and the risk of contagion arising from interactions between some participants may also create concentration risks for banking institutions exposed to this sector, particularly through “non-transparent arrangements for loans, investments, financing, services and operations”.

The fear of the regulators is the possibility of uncontrollable or unmitigated risks from the cryptocurrency sector to the banking sector. As a result, regulators say the sector is now under greater scrutiny:

The agencies are monitoring banking institutions that may be exposed to risks arising from the crypto-asset industry and are carefully reviewing any plans by these institutions to have significant involvement in activities related to crypto-assets.”

The “cautious and cautious approach” the agencies are taking in this regard is due to the recent bankruptcies of several major crypto companies.

And though unnamed, FTX is definitely one of those companies. The explosion of the stock market and its sister company Alameda Research Last November sent huge shockwaves through the cryptocurrency industry and beyond. Their impact continues to be felt as new information emerges almost daily.

There is no official ban

While nothing prohibits or discourages banking institutions from providing banking services to “any particular category or type” of customers as defined by law or regulation, the regulators said:

“The issuance or ownership of crypto-assets that are issued, held or transferred over an open, public and/or decentralized network or similar system is likely to be inconsistent with safe and sound banking practices. In addition, agencies are required to have significant crypto-asset-related security and reliability issues related to business models that dominate business or have significant exposure to the crypto-asset industry.”

With all of this in mind, regulators will monitor all of the banking institutions’ exposure to crypto-assets and issue further clarifications on the issue as needed.

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