Federal Reserve warns banks of crypto risks

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The Federal Reserve, together with the FDIC, and the Office of the Comptroller of the Currency, issued a joint statement warning banks of the risks of dealing with crypto.

The joint statement, published on Tuesday, gives a perceived litany of issues which could be associated with the crypto-asset sector according to the three US government organisations.

The first major risk in the statement is the possibility of fraud and scams. With the sector still largely unregulated, it can be difficult for individuals to protect themselves from unscrupulous actors looking to take advantage of unsuspecting investors.

Legal uncertainties are also a significant concern. Issues related to custody practices, redemptions, and ownership rights can all be murky and confusing, and some of these issues are currently the subject of legal proceedings.

In addition, some crypto-asset companies have been accused of making inaccurate or misleading representations and disclosures. This includes misrepresentations about federal deposit insurance and other practices that may be deceptive or abusive. These types of practices can cause significant harm to retail and institutional investors, customers, and counterparties.

The volatility of crypto-asset markets is another major risk. This volatility can have a range of impacts, including the potential for deposit flows associated with crypto-asset companies to be affected.

Stablecoins, which are designed to maintain a stable value, can also be a “run risk,” which could lead to deposit outflows for banking organisations that hold stablecoin reserves.

The interconnected nature of the crypto-asset sector also presents risks, as contagion within the sector is possible through opaque lending, investing, funding, service, and operational arrangements. These interconnections could also create concentration risks for banking organisations with exposures to the crypto-asset sector.

The risk management and governance practices in the crypto-asset sector have been criticised for being immature and lacking robustness.

The use of open, public, and decentralised networks also carries its own set of risks, including the lack of governance mechanisms, unclear roles and responsibilities, and vulnerabilities to cyber attacks and outages.

In outlining all of these perceived risks, the 3 governmental bodies have sought to make all banks publicly aware of them. However, it does make it clear that banks are not prohibited from providing banking services “of any specific class or type”, as long as they fall within the law.

Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

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