Banking Regulators Highlight Crypto-Asset Risks
Commentary by Steven Lofchie
In a joint statement, the FDIC, the Federal Reserve Board and the OCC (the "Agencies") highlighted key crypto-asset risks to banking organizations and outlined their approach to crypto-asset-related supervision.
The Agencies said that banking organizations should be aware of several key risks including: (i) fraud, scams and other deceitful activities; (ii) uncertainty surrounding custody practices, redemptions, ownership rights and a lack of robust risk management practices; (iii) misleading representations and disclosures by crypto-asset companies, including falsely advertising FDIC insurance; and (iv) significant volatility and contagion risk across the interconnected crypto-asset sector.
The Agencies warned that some risks are not able to be mitigated and that banks should take steps to ensure that those risks don't migrate into the banking system. In addition, the Agencies reiterated that banks are allowed to engage in crypto-asset activities as long as the activities (i) can be performed in a safe and sound manner, (ii) are legally permissible and (iii) comply with applicable laws and regulations. Further, the Agencies directed banking organizations to agency-specific interpretations and processes to, among other things, encourage robust supervisory discussions regarding proposed and existing crypto-asset-related activities.
Commentary
Banks should be able to, if nothing else, provide custodial services for digital assets. When the Madoff fraud was uncovered, the response of the regulators was not to say that securities activities were risky, and therefore banks should not provide custody as to securities. As to crypto assets, the real risk the bank regulators are imposing on the public is discouraging regulated entities from providing custodial services.