In light of the FTX crisis, banks should handle cryptocurrency with extra caution

Just two months after the financial world was rocked by the collapse of cryptocurrency exchange FTX, US regulators advised that banks should exercise greater caution regarding the dangers of fraud, legal uncertainty, and deceptive disclosures by crypto businesses.

The Federal Reserve, Federal Deposit Insurance Corp. (FDIC), and Office of the Comptroller of the Currency (OCC) expressed their worries about the safety and soundness of bank business models that are heavily focused on cryptocurrency in their first joint statement on the topic.

The regulators also stated that banks are "highly likely" to be at odds with safe and sound banking practices when they issue or keep crypto tokens that are kept on open, decentralized networks, potentially striking a blow to numerous institutions' ongoing efforts to provide consumers crypto services.

The statement comes after months of hesitancy from regulators to issue universal guidance or rules on cryptocurrencies, despite banks' requests for more clarity.

Prior to engage in specific crypto-related activities, such as holding tokens on behalf of clients, the OCC previously stated that banks must acquire regulatory approval, whereas the Fed previously encouraged banks to alert their supervisors before moving further with any activity involving crypto.

According to the joint statement, the authorities claimed they are closely examining bank proposals to engage in cryptocurrency activities and monitoring institutions that might be exposed to risks related to cryptocurrencies.

The regulators stated that it is crucial that hazards associated with the crypto-asset industry that cannot be reduced or regulated do not spread to the banking system.

The announcement comes as organizations dealing with digital assets reckon with high-profile collapses, most notably that of the cryptocurrency exchange FTX. In a federal court in Manhattan on Tuesday, founder Sam Bankman-Fried entered a not guilty plea to eight felony charges, including conspiracy to commit money laundering and wire fraud.

The Fed, FDIC, and OCC highlighted a number of dangers related to cryptocurrencies, including as the instability of the markets for digital assets, the risk of industry contagion, and poor risk management.

The regulators declared they would continue to collaborate with other agencies on cryptocurrency concerns and will make additional declarations about banks' operations linked to cryptocurrencies as necessary.

By fLEXI tEAM