US Bank Watchdogs Issue Joint Warning on Crypto Activities

Leading banking regulators in the United States have issued a new disclaimer to lenders about the risks associated with the use of cryptography.

Federal ReserveFederal Deposit Insurance Corp. And the Money Controller's office on Tuesday detailed the concerns regarding the volatile asset class. Officials said in a statement that it was important that risks that can’t be controlled aren’t allowed to migrate to the banking system. 

"Last year's events were marked by substantial volatility and vulnerability exposure in the crypto-asset sector," the agencies said. 

The warning follows a particularly tense period when it comes to cryptography. The November FTX stock market collapse left customers worldwide facing the potential for billions of dollars in losses.

The federal oversight bodies emphasized that the impact of the FTX implosion on the global financial system was minimal. However, he urged U.S. regulators to do more to avoid future disasters. 

Read more: American regulatory authorities warn against the risks of deeper crypto-wall links.

“It is important that risks associated with the cryptoasset industry that cannot be mitigated or controlled do not migrate to the banking system," regulators said. 

The guard dogs stated that they would continue to "adopt a prudent and prudent approach to current or proposed cryptoasset activities and exposures in each banking organization."

Some of the risks that the regulators identified include:

• Fraud and scams.
• Legal uncertainties surrounding custodial arrangements.
• Deceptive claims from crypto companies.
• Spread to the crypto industry.

While Wall Street has been slow to adopt cryptography, the collapse of FTX has revealed how some small American banks have become involved in the industry. For example, the firm listed in bankruptcy filings Silvergate Capital Corp.Signature Bank, which are both federally regulated, as places where it or related entities had accounts. Both companies reported that stock market deposits accounted for a very small percentage of their total deposits. 

On Tuesday, Signature Bank said that it supported regulators’ focus on crypto and that it has been taking steps to significantly reduce deposit concentrations related to crypto clients and others. "we do not lend in this space, nor trade, investment or safekeeping of crypto assets," the company said. Silvergate refused to comment on the joint declaration of the oversight bodies. 

Read more: Online banking from FTX raises embarrassing issues for regulators.

In October, Bank of New York Mellon Corp. Announced the launch of a digital asset platform in us to enable certain customers to hold and transfer Bitcoin and Aether. The company refused to comment on the statement of the regulators. 

On Tuesday, the watchdogs opposed what they called business models that had concentrated the industry's exposure. "Based on current understanding and experience with organizations to date, Agencies estimate that the issuance or possession of major crypto-assets that are issued, stored, or moved to an open channel, public, and/or distributed network, or a similar system is very likely to be incompatible with safe and healthy banking practices," they say. 

Lee reiners, Director of Policy at the Duke Financial Economics Center and past New York Fed Examiner, The commentary notes that regulators do not want banks to maintain cryptography on their books, to the exclusion of child care. 

However, the authorities have not announced any new rules or new repressive measures against the industry. They haven't mentioned the names of the companies either. 

“I find the response inadequate given what we’ve learned about the extent of fraud, misuse of customer assets and other misconduct,” said Arthur Wilmarth, professor emeritus at George Washington University Law School. “I would expect them to have a higher sense of alarm about this whole area.”

— With assistance by Yueqi Yang