US Banking Regulators Highlight Risks With Cryptocurrency
The Office of the Comptroller of the Currency (OCC) said that the digital asset industry was growing up but that its risk management was “not yet robust.”
A regulator for the US banking industry warned banks about the “emerging risks” of cryptocurrencies, saying that the sector should be “cautious” and, in some cases, ask permission before doing business with crypto or crypto firms.
In its Semiannual Risk Perspective for Fall 2022 report, released on December 8, the Office of the Comptroller of the Currency (OCC) called “dislocations” in the crypto market in 2022 one of “several key risks” of crypto.
Its three biggest worries are that “stablecoins may be unstable,” that the crypto industry doesn’t have mature risk management practices, and that the “high degree of interconnectedness” makes the risk of a virus spreading very high.
Concerns were raised about the lack of “consistent or comprehensive regulation” in the space, the volatility of crypto, and the growing number of firms that offer “bank-like products and services” using crypto and tokenized assets. The OCC thinks this raises questions about the stability of the financial system.
The depeg and collapse of the algorithmic stablecoin TerraClassicUSD (USTC) in May was used as an example of the “run risk” of stablecoins. As a result, asset-backed stablecoins also had small depeg events.
It highlighted stablecoin backings have “incrementally evolved” since, but believes most “remain susceptible to run risk.”
When talking about risk management, the OCC said that crypto firms’ practices were getting better but weren’t “robust” yet. It said that firms seemed “unprepared for the stresses and surprises” of the past year, which caused millions of investors to lose money.
“Hacks and outages are frequent, and fraud and scams remain high throughout the industry. In some cases, ownership rights, custody arrangements, and financial representations have created a high degree of confusion.”
The OCC says that the crypto market over the course of 2022 also showed the industry’s “interconnectedness” through a variety of secret lending and investing deals.
It said that crypto traders “may be doing highly leveraged trading,” which led to the risk of spreading.
In its advice to banks, the OCC said institutions considering engaging with crypto or crypto companies “should take a careful and incremental approach.”
Before doing anything crypto-related, the OCC told national banks that they should talk about their plans “with their supervisory office.” Some plans may need permission.
In the wake of FTX’s bankruptcy, crypto companies have taken steps to make things more clear. For example, many exchanges have added “proof-of-reserves” so that users can check that their crypto is backed by something, and some are doing public third-party audits.
