Prudential Regulators Release Joint Statement on Crypto Asset Risk Dechart LLP

On January 3, 2023, the Boards of Governors of the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) (collectively, the Agencies) issued a joint statement . On the Risks of Crypto Assets to Banking Organizations (Joint Statement).¹ The joint statement addresses the “significant volatility and exposure of vulnerabilities in the crypto sector” over the past year, including corporate failures, fraud and other misconduct allegations affecting the crypto sector. It follows several notable events. There has been an increase in law enforcement activity and regulatory scrutiny from financial regulators among market participants.

The joint statement highlights key risks associated with digital assets implemented using cryptographic technology, as well as key risks associated with the broader crypto asset sector. The joint statement emphasizes the importance of ensuring that “risks associated with the crypto sector that cannot be mitigated or controlled do not migrate into the banking system.”

Joint statement

In a joint statement, the Institutions stated that “it is not permitted to issue or hold any major cryptoassets that are issued, stored, or transferred in open, public, and/or decentralized networks or similar systems, provided, however, that the joint statement It also acknowledges that “banking organizations are not prohibited or encouraged from providing banking services to certain classes or types of customers pursuant to applicable law or regulation.”

The eight key risks listed in the joint statement are concentrated in the following areas:

• Anti-money laundering: Fraud and fraud risks in the cryptocurrency sector, including inaccurate or misleading representations or disclosures and other practices that may be unfair, deceptive or abusive.
• Regulatory uncertainty: Legal uncertainty and immature risk management and governance practices in the crypto sector. Some of which are currently subject to legal proceedings and proceedings.
• Volatility and contagion risk: Significant volatility in cryptocurrency markets, especially the susceptibility of stablecoins. The joint statement also said that there are certain contagion risks within the sector as certain participants are interconnected, leading to concentration risks.
• Decentralized Finance: Decentralized finance is characterized by “lack of governance mechanisms to establish oversight of the system; lack of contracts or standards to clearly establish roles, responsibilities and obligations; Vulnerabilities associated with.”

Through a joint statement, the institutions also stressed their serious concerns about business models that are concentrated in crypto-related activities or have concentrated exposure to the crypto-sector. The institution “ensures that current and proposed crypto-related activities by banking organizations can be conducted in a manner that adequately addresses safety and soundness, consumer protection, legal admissibility, and compliance with applicable laws.” We continue to evaluate if or how we can implement it.” Regulations, including anti-money laundering and illegal financial laws and regulations. “

Takeaway

While the joint statement does not provide further rulemaking, market participants should be aware of several concerns highlighted by the authorities.

Primarily, market participants should be aware of the current tightening of regulations regarding ensuring effective consumer protection, reducing volatility in cryptocurrency markets, and mitigating concentration risks.

Interested market participants should also be aware of the agency’s view that the issuance or storage of cryptocurrency assets in public or decentralized networks is “highly likely to be inconsistent with safe and sound banking practices.” there is. This could indicate that federal regulators have begun to take a firmer stance on cryptocurrency practices, suggesting an intention to pursue future regulatory or enforcement actions based on this assessment. There is also a possibility.

Market participants that constitute decentralized autonomous organizations or similar entities are equally alert to the authorities’ concerns that such organizations may not have adequate governance mechanisms or well-defined contracts and standards. need to do it. Whenever possible, such entities should consider providing clear procedures regarding investment contracts and transparent governance protocols. Banking organizations that may consider engaging with such decentralized entities should conduct thorough due diligence before committing to such associations.

Finally, entities participating in cryptocurrency and digital asset trading should continue to strengthen internal processes and protections designed to provide clarity and protect against risk exposure and fraud when it comes to banking.

footnote

1. Joint Statement on Crypto-Asset Risk to Banking Organizations, the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency (January 3, 2023).