Regulators Warn US Banks of Crypto Risks Including “Scams and Scams”

Ether has outperformed Bitcoin tremendously since both cryptocurrencies bottomed in June 2022. Ether’s stellar gains come as investors anticipate a major upgrade to the Ethereum blockchain called “The Merge.”

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U.S. banking regulators on Tuesday warned financial institutions that dealing with cryptocurrency exposes them to a number of risks, including fraud and fraud.

“Events over the past year have been marked by significant volatility and the exposure of vulnerabilities in the crypto-asset sector,” regulators said in a joint statement from the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency. The comments come just weeks after the spectacular collapse of crypto exchange FTX.

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Regulators said the risks include: “fraud and fraud among participants in the crypto-asset sector” and “risk of contagion within the crypto-asset sector arising from connections between certain crypto-asset participants.”

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During the crypto boom, when financial players seemed to announce a new crypto partnership every week, bank executives said they needed more guidance from regulators before delving more directly into bitcoin and other cryptocurrencies in retail and institutional trading.

Now, about two months after FTX filed for bankruptcy, the industry has been exposed as rife with poor risk management, interconnected risks and open fraud.

While the statement indicated that regulators were still evaluating how banks could adopt crypto while complying with their various consumer protection and anti-money laundering mandates, they seemed to give an indication of the direction they were headed.

“Based on the authorities’ current understanding and past experience, the authorities believe that the issuance or holding of crypto-assets that are issued, stored or transmitted on an open, public and/or decentralized network or similar system , high grade is unlikely to be consistent with safe and sound banking practices,” regulators said.

They also said they have “significant security and soundness concerns” with banks that focus on crypto customers or that have “concentrated exposures” to the sector.

Unlike the 2008 financial crisis, in which they played a central role, traditional banks have largely escaped the crypto meltdown. An exception was Silvergate Capital, whose shares have taken a hit over the past year.

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