Prudential Regulators Issue Joint Statement on Crypto-Asset Risks to Banking Entities
In January, the Federal Reserve Board, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) issued a joint statement on crypto-asset risks to banking organizations following significant volatility and vulnerabilities over the past year. The statement highlights key risks associated with digital assets implemented using cryptographic techniques, as well as the crypto-asset sector more broadly, that the prudential regulators believe banking organizations should consider. These include:
- Legal uncertainties related to custody practices, redemptions, and ownership rights, some of which are currently the subject of legal processes and proceedings
- Risk of fraud, including inaccurate or misleading representations and disclosures
- Significant volatility
- Susceptibility of stablecoins to run risk, creating potential deposit outflows for banking organizations that hold stablecoin reserves
- Interconnectedness, concentration, and contagion risk
- Heightened risks associated with open, public, and/or decentralized networks
The statement notes that “banking organizations are neither prohibited nor discouraged from providing banking services to customers of any specific class or type, as permitted by law or regulation.” However, the regulators’ statement warns that “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 prudential regulators will continue to analyze and assess this area in concert, while also working with relevant authorities charged with overseeing the crypto space.
Click here to read an OnPoint alert from Dechert covering the joint statement.