U.S. Regulators Warn Banks to Reduce Portfolio Exposure to Crypto

The effect of the FTX implosion which happened two months ago is still making waves around the world.

The US regulators have issued a warning to traditional financial institutions asking them to reduce their portfolio exposure to digital currencies. These regulators noted that dealing in digital assets exposes these banks to the risks of fraud, legal uncertainties, and scams.  

In a joint statement, the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corp expressed their skepticism about crypto. “The events of the past year have been marked by significant volatility and the exposure of vulnerabilities in the crypto-asset sector,” as per the published statement. 

Not speaking directly of the FTX implosion, banks were also warned to avoid a contagion risk “within the crypto-asset sector resulting from interconnections among certain crypto-asset participants.” These regulators as well as watchdogs in other regions are working on designing a strategy where banks can interact with cryptocurrency while still within the confines of customer protection and other regulatory frameworks.

“Based on the agencies’ current understanding and experience to date, the agencies believe that 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,” the joint statement outlined.

“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.”

Silvergate Bank Suffers FTX Contagion

Markedly, Silvergate Bank which is known to do business with crypto investors, especially stablecoin issuers has been subjected to several ridicules after the fall of FTX. 

Shortly after the FTX bankruptcy filing, FalconX a crypto prime brokerage firm severed all ties it had with Silvergate. The Chief Executive Officer (CEO) of the firm Alan Lane still went ahead to assure the public and its investors that it was still solvent and customers’ assets were safe.

Towards the close of 2022, fresh information surfaced claiming that Silvergate aided and abetted the fraud conducted on FTX. This shocking revelation immediately caused its shares to tank.