Regulatory agencies include the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency (OCC).
The crypto space received more regulatory attention until the end of 2022. The collapse of one of the world’s largest digital asset exchanges brought massive losses to the industry. This event prompted various watchdogs to express concerns and issue warnings about cryptocurrency compromise.
Some US federal regulators have recently commented on the risks of crypto activities. Regulatory agencies include the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency (OCC).
According to the report on Tuesday, January 3, 2023, some officials from the three regulatory agencies warned lenders about exposure to digital assets. They cited that risk escalation should not extend to the banking system.
“Agencies have significant security and robustness concerns with business models that concentrate on crypto-asset-related activities or have concentrated exposures to the crypto-asset sector,” the regulators detailed.
Regulators Cited Risks Associated with Crypto Compromise
The warning from watchdogs comes after the crash of the digital asset exchange FTX in 2022. Millions of customers lost their funds on the distressed platform, estimated at more than $8 billion.
They explained that the events of the past year showed “significant volatility and exposure of vulnerabilities in the crypto asset sector.” The regulators cited many risks, including fraud and scams, legal uncertainties, inaccurate or misleading representations by crypto companies, significant volatility in crypto markets, execution risks, and contagion risks.
“Based on the agencies’ current understanding and experience to date, the agencies believe that issuing or holding primary cryptographic assets that are issued, stored, or transferred on an open, public, and/or decentralized network or similar system is highly likely. is inconsistent with safe and sound banking practices,” the statement continues.
As regulators of the banking system, watchdogs pledged their undivided regulatory diligence. This means increased caution and stricter rules for banking organizations when it comes to digital exposure.
FTX Bankruptcy Created More Doubts
Before its implosion, FTX was ranked among the top crypto exchanges worldwide. It had millions of users and investors from different sectors.
Due to its bankruptcy, several individuals and companies exposed to the platform suffered huge losses. This generated concerns and reactions both inside and outside of the digital space. As a result, US regulators have tightened their regulatory rules on digital activities.
As revealed in the bankruptcy filing, some small banks exposed to the exchange include Signature Bank and Silvergate. However, the two banks reported holding only a minimal portion of total deposits on the distressed exchange.
According to US regulators, the financial system in general received less impact from the collapse of the FTX exchange. But the effect is still devastating for some people and companies that invested in the platform.
The Federal Reserve, the FDIC, and the OCC noted that they “will continue to closely monitor crypto asset-related exposures of banking organizations,” concluding as follows:
“Banking organizations must ensure proper risk management, including board oversight, policies, procedures, risk assessments, controls, security gates and barriers, as well as monitoring, to effectively identify and manage risks.”
By Audy Castaneda
