By
Bhushan Akolkar
April 17th, 2024
The joint warning statement by United States regulatory agencies is in line with Biden’s directive on the healthy adoption of blockchain technology and digital assets.
Top United States regulatory agencies – including the Board of Governors of the Federal Reserve System (Federal Reserve), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) – have issued a joint warning statement on related crypto assets risks to financial institutions. According to the announcement, the events in the crypto market for the past year have highlighted the associated risks to banking organizations in dealing with digital assets.
After the market scaled to its ATH during the fourth quarter of 2021, almost the entire crypto market has been trapped in a multi-week bear market. Notably, the Terra Luna fallout, the $600 million Ronin Bridge attack, and the FTX implosion have been attributed to the heightened crypto-assets risks.
Consequently, banks offering crypto custodial and lending services have been significantly hit by the ongoing crypto bear market and blockchain attacks. As such, worldwide regulators are concerned with crypto projects’ tokenomics, which favors founders at the expense of customers.
Feds Issue Risk Warnings to Banking Organizations Dealing with Crypto Assets
The joint statement by United States regulatory agencies is in line with Biden’s directive on the healthy adoption of blockchain technology and digital assets. Furthermore, the Biden administration issued an executive order on cryptocurrency last year, which has been adopted by Congress unanimously.
In a bid to bring sanity to the crypto market, the joint federal regulators are concerned with the legal grey area where crypto assets operate. Furthermore, most crypto projects are developed on public ledgers without a legal framework to protect users.
Nonetheless, the joint statement noted that banks are not prohibited from offering custodial or lending services.
“Banking organizations are neither prohibited nor discouraged from providing banking services to customers of any specific class or type, as permitted by law or regulation,” the joint statement reads.
Notably, the United States regulatory agencies are concerned with the high crypto volatility, which exposes banks to unwarranted operational risks. Additionally, the agencies highlighted the inaccuracies of crypto projects, which in turn give misleading data.
“The agencies 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,” the report noted.
The agencies also highlighted the challenges related to stablecoins and the ability of banking organizations to enact proper reserves. Furthermore, most of the blockchains where stablecoins operate have unregulated governance, which may end up putting banks at risk of bad actors.