Like a suit-and-tie version of The Avengers, three major US regulators have issued a joint statement warning of the risks posed by cryptocurrencies to traditional financial institutions, their customers, and “the broader US financial system”.
Published by the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC), much of the statement’s contents should come as little surprise to stakeholders.
Cited risks included fraud and scams, legal uncertainties, misleading representations made by cryptocurrency companies, volatility, and market contagion.
“It is important that risks related to the crypto-asset sector that cannot be mitigated or controlled do not migrate to the banking system,” read the statement.
Despite the warnings, the statement conceded that “banking organisations are neither prohibited nor discouraged from providing banking services to customers of any specific class or type, as permitted by law or regulation”.
The trio warned that holding crypto assets “is highly likely to be inconsistent with safe and sound banking practices”.
The joint statement comes at a time when interest in cryptocurrencies is gaining significant traction among some of the world’s largest financial institutions and investment firms.
Fidelity Investments recently ramped up its digital asset department with 100 new hires, predominantly focusing on nascent Bitcoin and Ethereum trading services.
As early as August 2021, JPMorgan Chase & Co (NYSE:JPM) was pitching a Bitcoin fund to wealthy private banking clients.
Goldman Sachs (NYSE:GS) is also on the hunt for distressed crypto firms, and plans to spend “tens of millions of dollars” on investments into cryptocurrency companies in the wake of the FTX digital asset exchange collapse, according to the bank’s head of digital assets Mathew McDermott.
But not all banks are bullish, especially not Santander, which recently blocked all UK customers from sending real-time payments to cryptocurrency exchanges as part of measures to protect customers from scams.
Fight the Fed
They say you shouldn’t fight the Fed with it comes to equity investing, but for the battle-hardened crypto traders, fighting the Fed comes with the territory.
Nothing symbolises this better than Tuesday’s joint statement, reckon’s AJ Bell’s head of investment analysis Laith Khalaf.
“This is a significant public intervention and a clear shot across the boughs for both the banking and crypto industries, which shows how concerned regulators are about crypto risks spilling over into mainstream financial institutions,” said Khalaf over email.
According to Khalaf: “The statement from US regulators draws a line in the sand and heavily discourages banks from getting any further into bed with the crypto industry, at least in terms of holding or issuing crypto assets.
“This regulatory warning is positive for the resilience of the banking sector, but it’s another chill wind for the crypto industry.”
Not that the crypto industry needed any more headwinds, right?