US agencies release joint statement on crypto risks

Following the FTX collapse, several US federal agencies joined efforts and warned the banks about the issues linked to crypto assets.

On Jan. 3, the Federal Reserve Board of Governors (the Federal Reserve), the Federal Deposit Insurance Corporation (the FDIC), and the Office of the Comptroller of the Currency (the OCC) together published cautionary statements on the danger that crypto assets pose to banking institutions.

Given the tremendous volatility and vulnerabilities during 2022, the joint statement outlines many critical concerns connected to crypto assets and the crypto asset sector. The agencies continue to take a cautious stance about the activities and exposures related to the banking sector’s current and proposed crypto assets. 

The US regulators are still evaluating whether banking institutions may carry out crypto operations securely, legally, and compliant with relevant laws and regulations.

Main risks associated with crypto assets

The group has outlined several major groups of risks related to crypto assets.

Legal risk includes all the issues around custody procedures, redemptions, and ownership rights, some of which are currently the subject of legal action.

Volatility in crypto-asset markets and the risky nature of stablecoins could impact deposit flows for organisations that deal with digital currencies. 

Decentralized, or open, networks are feared due to possible cyber-attacks, outages, lost or trapped assets, illegal funding, and a lack of governance processes providing monitoring of the system.

According to US regulators, practices for risk management and governance in the crypto-asset industry need more development and sturdiness. Significant harm to retail and institutional investors, customers, and counterparties is caused by inaccurate or misleading representations and disclosures by cryptocurrency companies, including false statements about federal deposit insurance.

How FTX collapse sparked regulatory interest

Many huge caps were destroyed by the bears in 2022. Some crypto firms declared bankruptcy, and the FTX fiasco increased calls for regulating cryptocurrencies worldwide, as the exchange filed for chapter 11 bankruptcy in November. 

In a federal court in Manhattan on Jan. 3, Sam Bankman-fried, the former CEO of FTX, entered a not-guilty plea to fraud and other counts following a series of revelations and legal actions.

BlockFi, Three Arrows Capital, Voyager Digital, and Celsius Network were just a few of the companies that suffered greatly due to FTX’s demise.