The Federal Reserves, the FDIC, and the Office of the OCC are just some of the top regulatory agencies in the United States that have issued (1) a joint warning statement regarding the risks that associated crypto assets pose to financial institutions.
According to the release, the activities that have taken place in the cryptocurrency market over the previous year have brought to light the risks linked with the involvement of banking organizations with digital assets.
After reaching its ATH in the 4th quarter of 2021, the vast majority of the crypto currency market has been caught in a bear market that has persisted for several weeks.
Specifically, the repercussions from Terra Luna, the attack on Ronin Bridge that cost $600 million, and the implosion of FTX have all been ascribed to the increased dangers associated with crypto-assets.
As a direct consequence of this, financial institutions providing crypto currency custody and lending services have taken a huge financial hit due to the current bear market in crypto currencies and attacks on blockchain technology.
As a result, authorities worldwide are concerned about the tokenomics of crypto currency initiatives. These projects tend to reward their founders at the expense of their clients.
Federal Reserves Issued Warnings to Financial Institutions on Crypto
The direction that President Biden issued on the appropriate use of blockchain technology and digital assets is consistent with the consensus reached by the regulatory agencies of the United States in their joint statement.
In addition, during the previous year, the government of Joe Biden issued an executive order regarding crypto currencies, which was subsequently overwhelmingly approved by Congress.
The joint federal regulators are concerned about the legal limbo in which crypto assets exist because they want to establish some sense of order in the cryptocurrency sector.
In addition, most cryptocurrency projects are established on public ledgers, yet no regulatory structure is in place to safeguard consumers.
Despite this, the joint statement made it clear that banks are not forbidden from providing services related to lending or custodial activities.
According to the joint statement (2), financial organizations are not barred from offering banking services to consumers of any particular class or kind, nor are they discouraged from doing so, as long as this is permitted by law or regulation.
Notably, the regulatory bodies in the United States are worried about the excessive volatility of cryptocurrencies, which puts banks in unnecessary danger of experiencing operational hazards. Additionally, the organizations drew attention to the inadequacies of cryptocurrency initiatives, which, as a result, provide inaccurate data.
According to the report, "The agencies are continuing to assess whether or how current and proposed crypto-asset-related activities by banking organizations can be conducted in a manner that adequately addresses safety and soundness, consumer protection, legal permissibility, and compliance with applicable laws and regulations, including anti-money laundering and illicit finance statutes and rules."
In other words, the agencies are determining whether or how current and proposed activities can be conducted in a manner that adequately addresses safety and soundness, consumer protection, legal permissibility, and compliance.
Additionally, the agencies brought attention to the difficulties associated with Stablecoins and the capacity of banking organizations to implement appropriate reserves. In addition, the majority of the blockchains on which Stablecoins function have governance that is not regulated, which may wind up putting institutions at danger of being taken advantage of by malicious actors.