A statement that highlights what they describe as “key risks for banking organizations associated with crypto-assets and the crypto-asset sector” and outlines approaches to supervision was issued jointly Tuesday by the three prudential federal banking regulators.
The agencies – the Federal Deposit Insurance Corp. (FDIC), Federal Reserve, and Office of the Comptroller of the Currency (OCC) – described the risks they see “as demonstrated by the significant volatility and vulnerabilities over the past year.” They said they continued to take “a careful and cautious approach” related to current and proposed crypto-asset-related activities and exposures at banking organizations.
For example, they said they are supervising banking organizations that possibly exposed to crypto-related risks and “carefully reviewing” any proposals from banking organizations to engage in activities that involve crypto-assets. They said their case-by-case approach so far has enabled them to keep learning and building expertise and understanding of the risks crypto-assets “may pose to banking organizations, their customers, and the broader U.S. financial system.”
Based on what they’ve seen so far, the agencies said they “believe that issuing or holding as principal crypto-assets that are issued, stored, or transferred on an open, public, and/or decentralized network, or similar system is highly likely to be inconsistent with safe and sound banking practices. Further, the agencies have significant safety and soundness concerns with business models that are concentrated in crypto-asset-related activities or have concentrated exposures to the crypto-asset sector.”
The agencies said there are numerous key risks of which banking organizations should be aware, including:
- Risk of fraud and scams among crypto-asset sector participants.
- Legal uncertainties related to custody practices, redemptions, and ownership rights, some of which are currently the subject of legal processes and proceedings.
- Inaccurate or misleading representations and disclosures by crypto-asset companies, including misrepresentations regarding federal deposit insurance, and other practices that may be unfair, deceptive, or abusive, contributing to significant harm to retail and institutional investors, customers, and counterparties.
- Significant volatility in crypto-asset markets, the effects of which include potential impacts on deposit flows associated with crypto-asset companies.
- Susceptibility of stablecoins to run risk, creating potential deposit outflows for banking organizations that hold stablecoin reserves.
- Contagion risk within the crypto-asset sector resulting from interconnections among certain crypto-asset participants, including through opaque lending, investing, funding, service, and operational arrangements. These interconnections may also present concentration risks for banking organizations with exposures to the crypto-asset sector.
- Risk management and governance practices in the crypto-asset sector exhibiting a lack of maturity and robustness.
- Heightened risks associated with open, public, and/or decentralized networks, or similar systems, including, but not limited to, the lack of governance mechanisms establishing oversight of the system; the absence of contracts or standards to clearly establish roles, responsibilities, and liabilities; and vulnerabilities related to cyber-attacks, outages, lost or trapped assets, and illicit finance.
Banks, they said, are not prohibited or discouraged from providing banking services to customers of any specific class or type, as permitted by law or regulation. However, the agencies said they “are continuing to assess whether or how current and proposed crypto-asset-related activities by banking organizations can be conducted in a manner that adequately addresses safety and soundness, consumer protection, legal permissibility, and compliance with applicable laws and regulations, including anti-money laundering and illicit finance statutes and rules.”
Additional statements on crypto asset-related exposures will be issued, as warranted, as the agencies learn more, they said.