Fed and others warn of risks cryptocurrencies pose to banks

Risks pointed out in the background such as FTX bankruptcy

Three U.S. authorities, including the U.S. Federal Reserve Board (FRB), issued a statement on the 3rd, calling attention to the risks crypto assets (virtual currencies) pose to banks.

Along with the Fed, the U.S. Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) are also on the list, listing risks the banking sector should be aware of with cryptocurrencies.

As a background, he explained that in 2022, “large fluctuations and exposure of vulnerabilities” were seen in the cryptocurrency field. It is a form that takes into account the series of events from May onwards, from the collapse of the old Terra ecosystem to the collapse of FTX. Specifically, he pointed out the following risks.

• Risk of fraud or fraud by industry participants
• Legal uncertainties regarding custody operations, token redemption and ownership
• The magnitude of volatility (price fluctuations) in the virtual currency market
• The risk of a stablecoin crash and the outflow of deposits from banks holding stablecoin reserves in the event of a crash
• Risks related to open and public networks

“Open, public networks” lack system monitoring mechanisms, lack of standards such as scope of responsibility, cyber-attack risks, and other vulnerabilities.

Another risk is the interconnection of cryptocurrency companies. Some of the companies in the sector are linked to each other in terms of funds, etc., so if something goes wrong, it may spread within the cryptocurrency sector.

As such, for banks with exposure to the cryptocurrency sector (portfolios subject to price fluctuations), such interconnections could also pose concentration risks.

In fact, since the collapse of the old Terra ecosystem in May, 3 Arrows Capital (3AC), which had invested in Terra’s project, and Voyager Digital, which had provided huge loans to 3AC, have gone bankrupt one after another. .

association: Binance US bids for assets of bankrupt Voyager for 140 billion yen

The Fed and others also said some cryptocurrency companies may make inaccurate or misleading statements that could harm investors and others.

As a specific example, in August 2022, the U.S. Federal Deposit Insurance Corporation (FDIC) explained to the U.S. version of FTX that FDIC insurance would apply to cryptocurrency-related accounts. I have asked for immediate rectification.

association: U.S. FDIC issued a cancellation notice regarding the mention of deposit insurance to five companies including FTX.US, a virtual currency exchange

association: Severe shock in the virtual currency market, summary of Alameda shock and FTX turmoil

Continue to monitor

In light of these risks, the Fed and others have concluded that “issuing or holding cryptocurrencies is likely to conflict with safe and sound banking practices,” and that “banks should carefully monitor cryptocurrency-related exposures.” I will continue,” he explained.

We will continue to issue statements and coordinate with other relevant authorities on the participation of banks in the cryptocurrency sector as necessary.

In December, the Group of Central Bank Governors and Chief Supervisors (GHOS) of the Bank for International Settlements also announced global standards for banks handling cryptocurrencies. Banks have just set the upper limit of cryptocurrency holdings to 2% of total assets.

association: Bank for International Settlements (BIS) sets bank virtual currency holding limit to 2%