High volatility and overall market uncertainty have forced US regulators to issue a warning for banks regarding the risks of the crypto space.
Multiple watchdogs published a joint statement in which they expressed serious concern about financial institutions falling victims to potential fraud due to misleading practices and legal uncertainties surrounding some of the digital asset firms out there.
The US Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency have all assured that they “continue to closely monitor crypto-asset-related exposures of banking organisations”.
“The events of the past year have been marked by significant volatility and the exposure of vulnerabilities in the crypto-asset sector,” the statement noted, highlighting that “it is important that risks related to the crypto-asset sector that cannot be mitigated or controlled do not migrate to the banking system”.
A notable part of the events from last year referred to by the regulators is of course the downfall of Forbes’ Under 30 crypto billionaire Sam Bankman-Fried and his FTX empire.
Payment Expert continuously reported on the events as they unfolded towards the end of 2022, starting from the public announcement by crypto exchange platform Binance, at one point both competitor and partner of FTX, that it is liquidating all of its stash of FTX-made FTT tokens due to uncertainties around the former’s balance sheet.
A surprising move by Binance then followed the next day, with the company announcing plans to fully acquire its rival in an effort to cover the FTT liquidity crunch caused by the cracks in the FTX financial portfolio starting to show up.
The fallout of the situation caused a butterfly effect across the whole crypto market, with investors thrown in despair as they saw as much as 46% wiped from the value of their investment interests.
Another curveball was thrown shortly after as Binance declared that it is backing out of the FTX deal, citing that efforts to aid FTX customers come out dry of the situation will remain fruitless due to the internal issues of what was once the second-biggest crypto exchange in the world being ‘beyond Binance’s control or ability to help’.
The ball then kept rolling further downhill as the US SEC launched a thorough investigation into FTX’s dealings, which led to Bankman-Fried stepping down as the CEO of the company before being arrested in the Bahamas and extradited back to the US after being on the run for almost a month.
In the latest development of the FTX fiasco, Bankman-Fried pleaded not guilty to all charges in front of a Manhattan courthouse two days ago. His trial is expected to begin in October of this year.
With all of this in the background, the Tuesday statement from the regulators advise that the necessary steps are taken by financial institutions to protect the wider financial system from such risks, as holding or issuing cryptocurrencies on decentralised networks is “highly likely to be inconsistent with safe and sound banking practices”.
The US, alongside the UK, Europe and other economic powerhouses, have all put the wheels in motion to introduce a regulatory framework in the cryptocurrency space.
