In a joint statement, the Federal Reserve, Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency have warned banks and financial institutions to be cautious of cryptocurrencies, citing the “significant volatility” and potential for fraud within the nascent sector.
The warning from regulators comes after the bankruptcy of cryptocurrency exchange platform FTX, which prompted bankruptcies among other exchange platforms and led to accusations of money laundering and fraud against the company's founder, Sam Bankman-Fried.
“Given the significant risks highlighted by recent failures of several large crypto-asset companies, the agencies continue to take a careful and cautious approach related to current or proposed crypto-asset-related activities and exposures at each banking organization,” the document said.
“The agencies have 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 incident has also intensified discussions about a possible central bank digital currency in the US, which would be managed by policymakers and tied to the dollar. Federal Reserve Chair Jerome Powell has said that he is "legitimately undecided" on whether the benefits of a digital dollar outweigh the costs and that any potential project would require "very broad support in society and in Congress."
The agencies have expressed concerns about business models focused on crypto-asset-related activities or with concentrated exposures to the crypto-asset sector, and have cautioned against scams, legal uncertainties, and contagion from recent turmoil in cryptocurrency markets.
While the statement clarified that offering services to cryptocurrency companies or engaging with the digital asset market is "neither prohibited nor discouraged," it also raised the possibility of money laundering risks, which banks are eager to avoid due to the severe penalties for executives deemed negligent in preventing the practice.
The agencies said they will continue to closely monitor crypto-asset-related exposures of banking organizations and will collaborate with other relevant authorities on issues arising from activities involving crypto-assets.
In the wake of FTX's bankruptcy, the Federal Reserve Bank of New York announced a partnership with financial institutions including BNY Mellon and Mastercard to conduct a simulation of a digital dollar. The test will explore the concept of a regulated liability network, a market infrastructure that would facilitate digital asset transactions using distributed ledger technology.
Critics of central bank digital currencies argue that digital assets pose privacy and security concerns. Republican members of the House Financial Services Committee have outlined a series of principles that any potential digital dollar project must meet, including the establishment of privacy guarantees, the promotion of private sector innovation, and the protection of the dollar as the world's reserve currency.
Despite the risks and uncertainties surrounding cryptocurrencies, some investors and analysts remain bullish on the sector. They argue that cryptocurrencies could revolutionize the financial system by offering a more efficient and transparent alternative to traditional currencies and financial instruments.