Banks that want to handle crypto assets or do business with crypto-focused companies will have to clear a high bar, bank regulators warned Tuesday.
In a joint statement, the Federal Reserve Board of Governors, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency said issuing or holding digital assets on open, public or decentralized networks is "highly likely to be inconsistent with safe and sound banking practices."
Similarly, the statement noted, the regulators have "significant safety and soundness concerns" about banks lending or providing other services to companies heavily involved in crypto activities.
"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," the statement reads.
For now, regulators will not prohibit banks from doing business with legal businesses, but those relationships will be scrutinized on an individual basis through each agency's supervisory practices.
"Banking organizations should ensure appropriate risk management, including board oversight, policies, procedures, risk assessments, controls, gates and guardrails, and monitoring, to effectively identify and manage risks," the statement said.
The three-page missive is the first joint statement from the regulators in 2023 and follows a year that was
In the statement, the regulators flagged a number of issues for banks to be aware of when it comes to dealing with crypto assets and related companies. The top concern was "fraud and scams" being perpetrated by crypto-sector participants, including those claiming to have FDIC insurance or otherwise misrepresenting themselves to customers.
Along with high-level concerns, such as money laundering and the financing of terrorism or other illegal activity, banks also need to make sure any of their crypto activities are in compliance with consumer-focused laws and regulations, including fair-lending requirements and prohibitions against unfair, deceptive and abusive practices.
Regulators encouraged banks to track the evolving legal requirements for providing custody services for digital assets and to be mindful of the risk management practices and governance mechanisms — or lack thereof — within crypto platforms with which they hope to partner.
Volatility within crypto markets and run risks associated with stablecoins were flagged as concerns, too. Banks were also cautioned to be aware of concentration risk, given how interconnected the crypto sector has proved to be, and to protect themselves from contagion risks more broadly.
As issues related to crypto assets continue to arise, the regulators will continue to release policy statements as warranted. They will also work with one another and other relevant authorities to craft new regulations as needed.
"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 statement said.
