On January 3, 2023, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance coverage Company (FDIC), and the Workplace of the Comptroller of the Foreign money (OCC) (collectively, the “Companies”) issued a joint assertion that reiterates sure features of prior crypto-asset-related steering and highlights dangers to banking organizations (the “Joint Assertion”). The Joint Assertion alerts that the Companies will take an more and more cautious strategy to reviewing crypto-asset actions and enterprise fashions of banking organizations to make sure that “dangers associated to the crypto-asset sector that can’t be mitigated or managed don’t migrate to the banking system.”[1]
The Joint Assertion identifies eight key dangers for banking organizations related to crypto-assets[2] and the crypto-asset sector. These key dangers embrace:
- Threat of fraud and scams amongst crypto-asset sector members.
- Authorized uncertainties associated to custody practices, redemptions, and possession rights, a few of that are at present the topic of authorized processes and proceedings.
- Inaccurate or deceptive representations and disclosures by crypto-asset firms, together with misrepresentations concerning federal deposit insurance coverage, and different practices that could be unfair, misleading, or abusive, contributing to important hurt to retail and institutional traders, clients, and counterparties.
- Vital volatility in crypto-asset markets, the results of which embrace potential impacts on deposit flows related to crypto-asset firms.
- Susceptibility of stablecoins to run threat, creating potential deposit outflows for banking organizations that maintain stablecoin reserves.
- Contagion threat throughout the crypto-asset sector ensuing from interconnections amongst sure crypto-asset members, together with via opaque lending, investing, funding, service, and operational preparations. These interconnections can also current focus dangers for banking organizations with exposures to the crypto-asset sector.
- Threat administration and governance practices within the crypto-asset sector exhibiting an absence of maturity and robustness.
- Heightened dangers related to open, public, and/or decentralized networks, or related methods, together with, however not restricted to, the dearth of governance mechanisms establishing oversight of the system; the absence of contracts or requirements to obviously set up roles, tasks, and liabilities; and vulnerabilities associated to cyber-attacks, outages, misplaced or trapped property, and illicit finance.
The Joint Assertion makes express that the Companies are neither prohibiting nor discouraging banking providers of any particular class or sort, offered the providers are permitted by legislation. The Companies are persevering with to evaluate present and proposed crypto-asset-related actions by banking organizations to find out how such actions could be carried out in a fashion that adequately addresses security and soundness, shopper safety, authorized permissibility, and compliance with relevant legislation. The Joint Assertion features a particular warning that “issuing or holding as principal crypto-assets which are issued, saved, or transferred on an open, public, and/or decentralized community, or related system is extremely more likely to be inconsistent with secure and sound banking practices.” As well as, the Companies warn that they’ve “important security and soundness considerations with enterprise fashions which are concentrated in crypto-asset-related actions or have concentrated exposures to the crypto-asset sector.” The Joint Assertion doesn’t outline what stage of focus in crypto-asset-related actions would give rise to security and soundness considerations.
In case you have questions concerning the Joint Assertion, or any of the matters addressed within the Joint Assertion, please be happy to achieve out to any of the authors of this alert.
[1] Joint Assertion on Crypto-Asset Dangers to Banking Organizations, Board of Governors of the Federal Reserve System, the Federal Deposit Insurance coverage Company, and the Workplace of the Comptroller of the Foreign money (January 3, 2023).
The Joint Assertion follows different actions taken by the Companies. See OCC Interpretive Letter 1179 “Chief Counsel’s Interpretation Clarifying: (1) Authority of a Financial institution to Have interaction in Sure Cryptocurrency Actions; and (2) Authority of the OCC to Constitution a Nationwide Belief Financial institution,” (November 18, 2021); Federal Reserve Board SR 22-6 / CA 22-6: “Engagement in Crypto-Asset-Associated Actions by Federal Reserve-Supervised Banking Organizations,” (August 16, 2022); and FDIC FIL-16-2022 “Notification and Supervisory Suggestions Procedures for FDIC-Supervised Establishments Participating in Crypto-Associated Actions,” (April 7, 2022).
[2] The Joint Assertion defines a “crypto-asset” as “any digital asset carried out utilizing cryptographic strategies.”
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