WASHINGTON—A group of powerful bank regulators on Tuesday highlighted what they said were a litany of risks stemming from cryptocurrencies and expressed skepticism that the assets can be safely held by the financial institutions they oversee.
The Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency said that recent failures of major crypto firms led them to exercise caution in reviewing banks’ proposals to engage with the market. They highlighted fraud and scams, market volatility, legal uncertainty, and weak risk-management and governance practices at crypto firms, among other things, as reasons for concern.
“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 regulators said in a joint statement. Based on their experience, they said, issuing or holding cryptocurrencies “is highly likely to be inconsistent with safe and sound banking practices.”
The warning reinforced policy makers’ dimming view of cryptocurrencies following the collapse of trading platform FTX in November and suggested bank regulators could throw up more hurdles for firms in the sector. Prosecutors say FTX and its affiliates misused customer funds, and they have charged its founder, Sam Bankman-Fried, with criminal offenses including fraud. He has pleaded not guilty.
Crypto imploded in 2022, as investors lost faith in digital assets and the industry was plagued with crisis. But unlike other collapses, it has largely avoided rippling into other markets. WSJ explains how crypto became so interconnected. Illustration: Mallory Brangan
The agencies said banks “are neither prohibited nor discouraged” from providing services to customers of any specific type. They said they are “continuing to assess whether or how” banks can deal with cryptocurrencies in a way that adequately ensures the institutions’ safety and soundness, consumer protection and legal compliance.
Since the 2009 launch of bitcoin, the first cryptocurrency, most large banks have been reluctant to embrace the asset class. The Securities and Exchange Commission says it considers most cryptocurrencies to be unregistered securities, making them legally risky for regulated firms to offer or sell.
But a handful of banks have gotten involved. California bank
Silvergate Capital Corp.
transformed itself from a small lender into a bank for cryptocurrency investors and exchanges and gets 90% of its deposits from such digital customers. Its stock has fallen nearly 80% in the past three months amid questions about its exposure to the industry.
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In the statement Tuesday, the bank regulators said they “have significant safety and soundness concerns with business models that are concentrated in crypto-asset-related activities or have concentrated exposures to the crypto-asset sector.”
They also warned of the susceptibility of so-called stablecoins—cryptocurrencies backed by supposedly safe, dollar-denominated assets—to potential runs by spooked investors. Such events could cause sudden deposit outflows for banks that hold cash reserves for stablecoin issuers.
The second-largest stablecoin issuer, Circle Internet Financial Ltd., said recently that it had more than $11 billion in cash held at banks including Silvergate,
Bank of New York Mellon Corp.
, Citizens Trust Bank and Customers Bank.
Dante Disparte,
Circle’s chief strategy officer, said in an email that the risks highlighted by regulators Tuesday “were mostly about greed, arrogance and in some …….