US Federal Agencies Release Joint Statement On Risks Surrounding Digital Assets

United States federal Agencies have released a joint statement where they discuss the risks of digital assets.

1/ The Federal Reserve, the FDIC and the OCC just released this devastating Joint Statement on Crypto-Asset Risks to Banking Organizations. https://t.co/nvmpg0Qpf4

— Margaret Rosenfeld (@RosenfeldM) January 3, 2023

The Federal Reserve, Federal Deposit Insurance Corporation (FCIC), and the Office of the Comptroller of the Currency (OCC) partnered.  The agencies came together to wish the banks they regulated a FUD-filled New Year. The federal agencies warned them about the risks associated with crypto assets before promising to help contain those risks.

U.S. Feds Issue A Statement On Crypto Assets

The United States Federal Bank Regulatory Agencies kicked off 2023 with a statement about cryptocurrencies. To do this, they reflected upon the troubles in the sector across 2022.

The Fed, FDIC, and OCC published the joint statement on Tuesday, January 3. They accounted for the past challenges and the Federal agencies’ efforts to maintain comfortable banking practices despite the problems.  A paragraph in the statement read:

“It is important that risks related to the crypto-asset sector that cannot be mitigated or controlled do not migrate to the banking system.”

However, they did not describe what mitigation factors or controls they have in mind. The agencies also identified eight specific risks, featuring fraud, volatility, and contagion, among other related issues.

According to the three Federal agencies, banking firms can legally offer banking services to their customer base. This is regardless of their social class or type, as defined by law and regulation. Nevertheless, they took a specific aim at the sector with a stern warning, saying:

The agency believes issuing or holding crypto assets as principal is highly likely to be inconsistent with safe banking practices. This is specifically for crypto-assets issued, stored, or transferred on an open, public, and/or decentralized network, or similar system.

Federal Agencies Supervising Banking Organizations

The agencies are supervising banking organizations that may be exposed to risks associated with the crypto-asset sector. They are also carefully reviewing any proposals from banking organizations to engage in activities that involve crypto-assets. These include fiat deposits of crypto.

FTX was not DeFi, neither was Celsius, Gemini, or BlockFi. However, the agencies caveat the blanket attack on decentralized technology. They acknowledge that it is “based on the agencies’ current understanding and experience to date”.

In their record, the agencies, define “Crypto-Assets as generally any digital asset implemented using cryptographic techniques.”  This means that brands issuing NFT loyalty rewards, like Starbucks, may be pressured by banks to stop.

It appears the state of cryptocurrency regulation in the U.S. may be due to a change. This concerns agencies’ “case-by-case approaches to date.”

“Through the agencies’ case-by-case approaches to date, the agencies continue to build knowledge, expertise, and understanding of the risks crypto-assets may pose to banking organizations, their customers, and the broader U.S. financial system.”

Every banking regulatory body is on record expressing concerns about crypto. Their attitudes come out as not being huge, however.

For example, an FDIC representative is on record speaking positively about stablecoins. In the same way, the OCC has recently taken the initiative of engaging more actively with fintech. Finally, the Federal Reserve has been active, if not non-committal, to show interest in central bank digital currency (CBDC).

Federal Agencies Concerned About Crypto-Asset-Related Business Models

Moreover, the agencies have significant safety and soundness concerns with business models that are concentrated in crypto-asset-related activities. They are also concerned about business models having concentrated exposures to the crypto-asset sector. This means they are concerned about any business focused on blockchain tech.

Following the statement, investors cannot help but worry about seeing mass de-risking of any blockchain-related companies by US banks.

Even if a company is banked outside the U.S., there is potential for issues to arise. This is because corresponding banks regulated by these agencies may de-risk those banks as well.

The joint statement comes as a shock giving tensions ran high among regulators in the crypto space across 2022. The agencies argued about which department had regulatory authority over digital assets.

The joint statement passes as the first show of federal banking agencies joining forces. However,  a few agencies were notably left out from the statement.

The Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), and the Consumer Financial Protection Bureau (CFPB) were not part of the press release. This is although each one of them has a history of making a play at power.

According to analysts, the aftermath of the FTX collapse has put pressure on regulators. They are finally laying out formal guidance and regulations for banks and crypto firms. Before now, regulators had taken a casual stance on crypto regulation such as making informal statements and making occasional assurances through investigations.

With the recent formal statement where they present a single front, the federal agencies could be foreshadowing something more solid that is coming. However, as not every agency has acted in the press release, the power struggle may still override any efforts to control the cryptocurrency sector.