Regulatory Note — Crypto-Assets: Joint Statement on Supervision
On January 3, 2023, the three federal banking agencies issued a Joint Statement on Crypto-Asset Risks to Banking Organizations (the “Joint Statement”). [1] The publication is prompted by the recent failure of FTX and other events in 2022 that exposed several risks, notably the potential for problems in the crypto-asset sector to migrate to the banking system.
Although the Joint Statement does not offer much in the way of new supervisory guidance, it makes two critical points for banking organizations engaged in or planning to engage in crypto-asset activities:
It is “highly likely” that an organization is engaged in an unsafe or unsound practice if it issues or holds as principal crypto-assets that are issued, stored, or transferred on an open, public, and/or decentralized network, or similar system.
According to the Joint Statement, such networks lack governance mechanisms and do not have contracts or standards that establish roles, responsibilities, and liabilities. They also are vulnerable to cyber-attacks, outages, lost or trapped assets, and illicit finance. The clear lessons here for the banking industry are, first, that an organization now using any such network should promptly consider possible alternatives and, second, that an organization considering the use of such a network should recognize that possibility as a non-starter.
There are “significant safety and soundness concerns” with business models that are concentrated in crypto-asset-related activities or have concentrated exposures to the crypto-asset sector.
The Joint Statement identifies several risks in the sector: fraud; legal uncertainty; unfair, deceptive, or abusive practices (including misrepresentations about deposit insurance); significant volatility in the crypto-asset market that could affect deposit flows; run risk associated with stablecoins; contagion risk among crypto-asset participants; and risk management and governance practices that lack maturity and robustness. Given the extent of these concerns, a banking organization that has given or plans to submit prior notice of such plans should prepare for a skeptical response from its federal regulator.
For the time being, the 2021 and 2022 statements from each of the agencies on crypto- asset-related activities – OCC Interpretive Letter No. 1179, Federal Reserve SR Letter 22-6, and FDIC FIL-16-2022 – are the authoritative guidance on crypto assets, but the Joint Statement indicates that further guidance may be warranted.
[1] Per earlier guidance, a crypto-asset is “any digital asset implemented using cryptographic techniques.”