U.S. Regulators Warn Banks That Crypto Is Not 'Safe and Sound'

The Federal Reserve and two other U.S. regulators today issued a warning to banks about cryptocurrencies. 

In a joint statement, the Board of Governors of the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) said banks should be aware of the “significant volatility and vulnerabilities over the past year” the crypto industry experienced this year. 

The regulators added that banks with exposure to crypto could especially be at risk. So-called "challenger banks," or next-generation financial institutions, have started offering digital asset services around the world.

“Based on the agencies’ current understanding and experience to date, the agencies believe that issuing or holding as principal crypto-assets that are issued, stored, or transferred on an open, public, and/or decentralized network or similar system is highly likely to be inconsistent with safe and sound banking practices,” the Monday statement read. 

The joint declaration comes as U.S. politicians press regulators for more transparency from the digital asset industry following the November collapse of mega exchange FTX. 

Democratic senators Elizabeth Warren of Massachusetts and Tina Smith of Minnesota last month asked Federal Reserve Chairman Jerome Powell for information on American banks’ ties to crypto following the collapse of crypto exchange FTX. 

'Grossly Inexperienced and Unsophisticated' Leadership Caused FTX Collapse, Says New CEO

The new CEO of failed crypto exchange FTX, John J. Ray III, has said that the company’s collapse was caused by “a very small group of grossly inexperienced and unsophisticated individuals.” In remarks prepared ahead of a House Financial Services Committee hearing tomorrow, the man in charge of restructuring the fallen company’s finances also claimed that despite his experience he had never seen “such an utter failure of corporate controls.” Ray has dealt with some of the biggest bankruptcies in...

The politicians voiced concern because Alameda Research, FTX’s sister company, invested $11.5 million in Washington-based bank Moonstone, and other U.S. bank’s were experiencing “heightened volatility” due to crypto investments. 

Crypto regulation in the U.S. is also a hot topic following the FTX’s bankruptcy because many American customers had used the company’s services, despite the firm being based in The Bahamas.

Billions of dollars of customers’ cash went up in smoke because of alleged mismanagement. FTX—which clients used to buy, sell or bet on crypto—crumbled in a highly publicized collapse because it used client money to make risky investment bets through trading firm Alameda Research, prosecutors allege. 

The firm’s disgraced ex-CEO—who founded both FTX and Alameda Research—is now facing eight criminal charges. He today pleaded not guilty before a federal court in New York as part of his arraignment, and the judge agreed to keep the names of his $250 million bond co-signers secret.