Federal Banking Agencies Issue Joint Statement on Crypto-Asset Risks to Banking Organizations | Practical Law

Federal Banking Agencies Issue Joint Statement on Crypto-Asset Risks to Banking Organizations | Practical Law

The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of Currency (OCC) issued a joint statement to banking organizations on the risks associated with crypto-assets and crypto-asset sector participants.

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

by Practical Law Finance
Published on 04 Jan 2023 • USA (National/Federal)
The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of Currency (OCC) issued a joint statement to banking organizations on the risks associated with crypto-assets and crypto-asset sector participants.
On January 3, 2023, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Company (FDIC), and the Office of the Comptroller of Currency (OCC) (collectively, the agencies) issued a joint statement to banking organizations on the risks associated with crypto-assets and crypto-asset sector participants.
Among other points, the joint statement reflects the view of the agencies that issuing or holding as principal crypto-assets that are issued, stored, or transferred on an open, public, and/or decentralized network, or similar systems, is highly likely to be inconsistent with safe and sound banking practices.
Commenting on the past year of significant volatility in the crypto-asset sector, the agencies highlight several risks that banking organizations should be aware of, including:
  • Risk 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.
  • Susceptibility of stablecoins to 'run risk,' creating potential deposit outflows for banking organizations that hold stablecoin reserves.
  • Contagion risk 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.
  • A lack of maturity and robustness exhibited by risk-management and governance practices in the crypto-asset sector.
  • Heightened risks associated with open, public, and/or decentralized networks, or similar systems, including the lack of governance mechanisms establishing oversight of the system, the absence of contracts or standards to clearly establish roles, responsibilities, and liabilities, as well as vulnerabilities related to cyber-attacks, outages, lost or trapped assets, and illicit finance.
The joint statement emphasizes that the risks related to the crypto-asset sector that cannot be mitigated or controlled should not migrate to the traditional banking system. To combat these risks, the agencies are supervising banking organizations that may be exposed to risks stemming from the crypto-asset sector, reviewing any proposals from banking organizations to engage in activities involving crypto-assets, and continuing to build their knowledge, expertise, and understanding of the risks crypto-assets may pose to banking organizations.
The agencies are not prohibiting or discouraging banking organizations from providing banking services to customers of any specific class or type, as permitted by law or regulation, but they are continuing to assess whether and how current and proposed crypto-asset-related activities by banking organizations can be conducted in a manner that adequately addresses safety, consumer protection, legal permissibility, applicable law and regulatory compliance.
The joint statement provides that banking organizations should ensure that crypto-asset-related activities can be performed in a safe and sound manner, are legally permissible, and comply with applicable laws and regulations. Additionally, banking organizations should ensure appropriate risk management, including board oversight, policies, and monitoring to effectively identify and manage risks.