Federal Banking Regulators Issue Joint Statement on Crypto-Asset Risks to Banking Organizations

On Jan. 3, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) (collectively, the “Agencies”) issued a statement on crypto-asset risks to banking organizations.

The Agencies noted that the events of the past year have been marked by significant volatility and the exposure of vulnerabilities in the crypto-asset sector and highlight a number of key risks associated with crypto-assets and crypto-asset sector participants that banking organizations should be aware of, including:

• Risks 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
• The susceptibility of stablecoins to run risk, creating potential deposit outflows for banking organizations that hold stablecoin reserves
• Contagion risks 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 cyberattacks, outages, lost or trapped assets, and illicit finance.

The Agencies noted that it is important that risks related to the crypto-asset sector that cannot be mitigated or controlled not migrate to the banking system. The Agencies indicated that they are carefully reviewing any proposals from banking organizations to engage in activities that involve crypto-assets. The Agencies stated that, given the significant risks highlighted by recent failures of several large crypto-asset companies, they will continue to take a careful and cautious approach related to current or proposed crypto-asset-related activities and exposures at each banking organization.

Importantly, the Agencies stated that, based on their current understanding and experience to date, 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 indicated that they 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 full text of the Agencies’ statement can be found here.