US regulators warn banks of crypto dangers

As the financial world continues to reckon with the collapse of crypto exchange FTX – and the fraud surrounding the company – US regulators have told banks to be more careful on crypto contagion risks.

The Federal Reserve, Federal Deposit Insurance Corp (FDIC) and the Office of the Comptroller of the Currency (OCC) have issued their first joint statement on crypto, in which the regulators highlight risks of fraud, legal uncertainty and misleading disclosures by crypto firms as reasons for banks to be more cautious.

It said that it is “highly likely” that banks issuing or holding crypto tokens on public decentralised networks will be inconsistent with safe banking practices.

Other risks associated with crypto identified by the trio include the volatility of the digital assets market, contagion risk within the sector and wear risk management.

While the statement does not entirely caution against banks’ involvement in crypto, it notes: “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 public statement will come as a blow to some big banks which are ramping up efforts to provide crypto services to their customers.

The statement added:“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 organisation.”

The OCC had previously said that banks operating in the US must obtain regulatory approval before engaging with certain crypto activities.

Fraud is becoming increasingly visible at a top level in the crypto world, with FTX founder Sam Bankman-Fried facing eight criminal charges including wire fraud and conspiracy to commit money laundering. The 30-year old pleaded not guilty on all charges in a Manhattan federal court on Tuesday.

Elsewhere, Cooper Morgenthau a former chief financial officer of multiple special purpose acquisition companies (SPACs), has pleaded guilty to embezzling more than $5 million from the companies he worked for and losing almost all of it trading meme stocks and cryptocurrencies. Pleading guilty to one count of wire fraud in Manhattan federal court, Morgenthau faces a possible prison statement of up to seven and a quarter years. He has also agreed to forfeit $5.11 million and pay an equal amount in restitution.

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