U.S. regulators warn banks about crypto ‘contagion risk’ post FTX

Federal bank regulators warned banks about investing in crypto this week, in what might be a prelude to more aggressive regulations to come.

The guidance comes after the recent “failures of several large crypto-asset companies,” according to a press release put out by the Federal Reserve, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency.

Without mentioning recent implosion of the crypto exchange FTX by name, regulators said that due to poor oversight, crypto-asset companies are a “contagion risk” for banks. They cited other concerns, too, such as frauds or scams, legal uncertainties around custody of crypto assets, and misleading statements by crypto firms.

While regulators warned that “risk management and governance practices” in crypto space lack “maturity and robustness,” they stopped short of announcing new rules or regulations for banks that invest in crypto assets. They didn’t discourage partnerships between banks and crypto companies, either.

The agencies said they will take a “careful and cautious approach” to “crypto-asset-related activities and exposures” at each bank. 

“The statement is a bit ominous as far as the riskiness of crypto goes, without any advice on how to address it,” says David Schwed, chief operating officer at the blockchain security firm Halborn. “However, it shows that the federal regulatory agencies are actively involved in helping to restore stability in the markets.”

While the regulators’ warning “shines a light on many of the risks associated with digital assets,” Schwed thinks that it’s “nothing more than an advisory of generalized high-level risks.”

Following the collapse of FTX, the White House called for more regulation of cryptocurrencies, as did crypto enthusiast and celebrity investor Kevin O’Leary.

Much more needs to happen when it comes to regulation, Schwed adds, but he doesn’t expect “anything sweeping” this year.

The takeaway from the statement is that banks will need to be cautious when considering investments in crypto assets, says Mina Tadru, CEO at the investment firm Tadrus Capital.

“This warning could make increased regulation of crypto investments more likely in the future,” says Tadru. Such regulations could include increased reporting and capital requirements, as well as limits on the types of investments that banks can make in crypto assets.

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