Approach with caution: US banking regulator’s crypto warning

A United States banking industry regulator warned banks of the “emerging risks” of cryptocurrencies saying the sector should take a “cautious approach” and seek permission in some cases when engaging with crypto or crypto firms.

Citing “dislocations” in the crypto market over 2022 the Office of the Comptroller of the Currency (OCC) highlighted what it said were “several key risks” of crypto in its Dec. 8 Semiannual Risk Perspective for Fall 2022 report.

Its three main concerns are that “stablecoins may be unstable,” the crypto industry lacks mature risk management practices and has a high risk of contagion due to the “high degree of interconnectedness.”

The space’s lack of “consistent or comprehensive regulation” and the volatility of crypto along with the increased range of firms offering “bank-like products and services” using crypto and tokenized assets were also cited as concerns, which the OCC believes raises questions regarding financial stability.

The depeg and collapse of the TerraClassicUSD (USTC) algorithmic stablecoin in May was given as an example of stablecoins’ “run risk,” and how asset-backed stablecoins also saw minor depeg events as a result.

It highlighted stablecoin backings have “incrementally evolved” since, but believes most “remain susceptible to run risk.”

Discussing risk management the OCC said practices at crypto firms were maturing but are “not yet robust” with firms appearing “unprepared for the stresses and surprises” over the past year that saw losses for millions of investors, it added:

Hacks and outages are frequent, and fraud and scams remain high throughout the industry. In some cases, ownership rights, custody arrangements, and financial representations have created a high degree of confusion.

The crypto market over 2022 also revealed the industry’s “interconnectedness [...] through a variety of opaque lending and investing arrangements” according to the OCC.

It remarked crypto participants “may be engaging in highly leveraged trading” which resulted in the noted contagion risk.

In its advice to banks, the OCC said institutions considering engaging with crypto or crypto companies “should take a careful and incremental approach.”

The OCC advised national banks that crypto-related plans should be discussed “with their supervisory office” before they engage in any activities as some potentially require permission.

Crypto companies have moved to improve transparency in the wake of the bankruptcy of FTX with many exchanges introducing proof-of-reserves so users can verify crypto backings along with some conducting public third-party audits.