FTX Crash

Two months after FTX filed for bankruptcy, the industry has come to light as being replete with fraud

Financial institutions were alerted by U.S. banking regulators on Tuesday that using cryptocurrencies exposes them to a variety of dangers, including fraud and scams. The Federal Reserve, Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency released a joint statement saying that “the events of the last year have been characterised by considerable volatility and the exposing of vulnerabilities in the crypto-asset sector.” The announcement follows the dramatic collapse of the cryptocurrency exchange FTX by only a few weeks. The hazards, according to regulators, include “fraud and scams among participants in the crypto-asset sector” and “contagion risk within the crypto-asset sector deriving from interconnections among specific crypto-asset participants.”

Financial institutions were alerted by U.S. banking regulators on Tuesday that using cryptocurrencies exposes them to a variety of dangers, including fraud and scams.  The Federal Reserve, Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency released a joint statement saying that “the events of the last year have been characterized by considerable volatility and the exposing of vulnerabilities in the crypto-asset sector.” The remarks follow the stunning collapse of the cryptocurrency exchange FTX in only a few weeks. According to the regulators, there is a danger of “fraud and frauds among players in the crypto-asset sector” and “contagion risk inside the crypto-asset sector due to interconnections among some crypto-asset participants.”

Bank executives claimed they needed more direction from regulators during the cryptocurrency boom, when it seemed like financial players would announce a new cryptocurrency partnership every week, before dealing more directly with bitcoin and other cryptocurrencies in their retail and institutional trading operations. About two months after FTX filed for bankruptcy, the industry has come to light as being replete with shoddy risk management, related dangers, and outright fraud. Despite the fact that the statement said that authorities were still considering how banks may adopt cryptocurrency while upholding their numerous consumer protection and anti-money laundering responsibilities, it appeared to give a hint as to which direction they were headed.

According to the regulators, “issuing or holding as principal crypto-assets that are issued, stored, or transferred on an open, public, and/or decentralized network, or similar system, is highly likely to be inconsistent with safe and sound banking practices,” based on their current knowledge and experience to date. They added that they had “serious safety and soundness concerns” about banks that concentrate their exposure to the industry or cater to customers who use cryptocurrencies. Contrary to the 2008 financial crisis, in which they played a significant role, traditional banks have mostly avoided the crypto catastrophe. Silvergate Capital is one exception, whose shares have taken a beating over the past year.