American Bar Association’s Business Law Today - January
On January 3, 2023, the Board of Governors of the Federal Reserve System (Federal Reserve), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) (collectively the Agencies) issued a joint statement on the risks of crypto-assets to banking organizations. The statement came after a year of twists and turns for the cryptocurrency industry. The Agencies highlighted the “significant volatility and the exposure of vulnerabilities in the crypto-asset sector.”
The Agencies identified eight key risks associated with “crypto-assets,” which generally refer to any digital assets implemented using cryptographic techniques, and the crypto-asset sector. Some of the key risks that banking organization should be aware of include, but are not limited to: the risk of fraud and scams among crypto-asset sector participants; inaccurate or misleading representations and disclosures by crypto-asset companies, including misrepresentations regarding federal deposit insurance; susceptibility of stablecoins to run risk, creating potential deposit outflows for banking organizations that hold stablecoin reserves; and risk management and governance practices in the crypto-asset sector exhibiting a lack of maturity and robustness.
While the Agencies state that banking organizations are neither prohibited nor discouraged from providing banking services to any legally permitted subset of customers, the Agencies take a “careful and cautious” approach and believe that “issuing or holding as principal crypto-assets that are issued, stored, or transferred on an open, public, and/or decentralized network, or similar system is highly likely to be inconsistent with safe and sound banking practices.” This approach is premised on the Agencies’ “current experience and understanding to date.”
Accordingly, the Agencies will continue to closely monitor crypto-asset-related exposures of banking organizations, and where warranted, issue additional statements. The Agencies also will continue to enhance their knowledge, expertise, and understanding of how crypto-assets can impact banking organizations from the individual banking customer to the U.S. financial system as a whole. Given the proceed-with-caution position the Agencies appear to take, it is important for banking organizations to ensure that risk management programs are equipped to effectively identify and manage risks that are presented by crypto-assets to ensure compliance with applicable laws, including those designed to protect consumers and combat illicit activity and financial crime.
Reprinted with permission from the American Bar Association’s Business Law Today January Month-In-Brief: Business Regulation & Regulated Industries.
