Why the Federal Reserve and U.S. Regulators Warn Banks of Cryptocurrencies After FTX’s Fall
The Federal Reserve and two other U.S. regulators sent a warning to banks about cryptocurrencies on January 3.
The sudden failure of FTX, a cryptocurrency platform that was worth $32 billion before it filed for bankruptcy in November, has caused a lot of worry in the industry as a whole. The joint statement comes at a time when politicians are putting pressure on regulators to require more visibility from the digital asset sector in the aftermath of the failure of the major exchange FTX in November.
After the cryptocurrency exchange FTX failed, two Democratic senators, Elizabeth Warren of Massachusetts and Tina Smith of Minnesota, wrote to Jerome Powell, the head of the Federal Reserve, asking for more information about how American banks are connected to cryptocurrency.
Sam Bankman-Fried, the infamous CEO of FTX, is now accused of operating one of the greatest financial scams in American history. Because of this, there have been requests for there to be additional laws and regulations.
In a joint statement about cryptocurrencies, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) said, “It is vital that risks related to the crypto-asset sector that cannot be mitigated or controlled do not migrate to the banking system.” They said, “The events of the past year have been marked by significant volatility and the exposure of vulnerabilities in the crypto-asset sector.”
The agencies say that financial institutions need to be aware of potential threats like fraud and scams, as well as wrong or misleading disclosures. There is also “substantial volatility” in crypto-asset markets, and there is a risk of an “outbreak” in the sector because of links between participants that are not clear, which could include lending, investing, or funding.
The regulators have indicated that they will continue to adopt a “careful and cautious approach” when it comes to the use of cryptocurrencies and their exposure in banking institutions.
In the meantime, the statement advised financial institutions to “ensure appropriate risk management” by implementing safeguards and board monitoring, among other measures, in order to recognize and address potential risks.
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