The Federal Reserve Is Flagging Crypto Assets As ‘Dangerous’

By Kevin • January 9, 2023 7:53 pm • Comments

A number of financial regulatory entities within the United States just made a bold statement where they warn about the significant “risks” that crypto has on the existing banking system.

These entities include the Federal Reserve, the FDIC, and the Office of the Comptroller of the Currency (OCC) and it is likely that there are also many other traditional banking institutions that have the same position.

However, it seems that the statement reveals something very specific about their stance.

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It is not the fact that these institutions and banking systems are unwilling to adopt the new technologies that are coming out of the crypto sector.

In fact, they are very open to innovating with the latest technology in order to take advantage of all the potential benefits.

The main reason is that there are “risks” within crypto that may cause them to lose control and such risks should not be used.

Yahoo reports:

“It is important that risks related to the crypto-asset sector that cannot be mitigated or controlled do not migrate to the banking system,” the agencies said in a joint statement.

“Given the significant risks highlighted by recent failures of several large crypto-asset companies, the agencies continue to take a careful and cautious approach related to current or proposed crypto-asset-related activities and exposures at each banking organization.”

Regulators are warning banks about a long laundry list of risks when it comes to crypto, including fraud, volatility, poor risk management, and contagion within the crypto sector.

The agencies also flagged legal uncertainties when it comes to redemptions, ownership rights, and custody practices for crypto assets.

It is also not a coincidence that these statements from the financial regulatory entities came out after the collapse of the crypto exchange FTX.

The collapse has been used by a number of lawmakers already as a reason to push for stricter regulations on the crypto industry.

This is despite the fact that the regulations that they are trying to push have nothing to do with protecting investors which was needed in order to prevent something like a crypto exchange collapse.

After all, the SEC’s main role is to protect investors from fraud and it is clear that the SEC had failed to do anything about FTX as it was too late.

Whether or not the new regulations that are being pushed now will actually become law is still to be determined, but it is clear that 2023 may have a lot of change for crypto.

Yahoo concludes:

“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 are overseeing banks that may be exposed to risks from the crypto sector and reviewing any proposals from banks to engage in crypto activities.

The OCC has put in place rules where banks must ask permission to be able to engage in any crypto activities. Acting Comptroller of the Currency, Michael Hsu, has compared crypto to derivatives in the early 2000’s, warning about the risk of contagion with crypto and saying the industry’s growth has been driven by hype.

The Financial Stability Oversight Council is watching cryptocurrency markets closely, but has yet to deem crypto activities as systemic.

A few bills have been proposed in Congress to regulate crypto, though it will take time for the legislation to make its way over the finish line.

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