The Federal Reserve and two other US regulatory bodies have issued a warning to banks about cryptocurrencies. In a joint statement, the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency (OCC) said that banks should be aware of the “significant volatility and vulnerabilities” experienced by the crypto industry in 2022.
Banks with exposure to crypto could be especially at risk, the regulators added. The statement reads, “Based on the agencies’ current understanding and experience of crypto, (the agency) believes that digital assets issued, stored, and transferred on a decentralized network (the blockchain) are opposite to safe banking practices.” Furthermore, regulators added that “new age” banks that offer digital asset services globally are especially vulnerable.
Regulators seemed to have put their foot on the gas after the collapse of the mega-exchange FTX. The company, which clients used to buy, sell, or bet on crypto, collapsed due to alleged mismanagement, with billions of dollars of customers’ cash being lost as a result. It is alleged that FTX used client money to make risky investment bets through trading firm Alameda Research. The firm’s ex-CEO, who founded both FTX and Alameda Research, is now facing eight criminal charges and pleaded not guilty during his arraignment in a federal court in New York. The judge has agreed to keep the names of his $250 million bond co-signers secret.
As a result, Democratic senators Elizabeth Warren of Massachusetts and Tina Smith of Minnesota have particularly voiced concerns about U.S. bank ties with FTX and Alameda Research. The two senators have also requested Federal Reserve Chairman Jerome Powell provide more information on bank ties with crypto after it was revealed that Alameda Research invested $11.5 million in Washington-based bank Moonstone, and other US banks were experiencing “heightened volatility” due to crypto investments.