U.S. banking regulators have warned domestic financial institutions that delving into the world of cryptocurrencies could pose various risks, such as fraud.
The warning is the result of a catalytic 2022 that saw the demise of multiple cryptocurrency giants, including FTX, Terraform Labs, Three Arrows Capital, Celsius Network, etc. The collapse of these companies triggered billions of dollars in investor losses and caused panic in the industry, leading to a sharp drop in the market.
Beware of risks
The Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency issued a joint statement advising U.S. banks to be extra careful when dealing with cryptocurrencies because of the risks in the field. Monetary institutions may become victims of fraud and scams, or be involved in collapsed projects, resulting in serious losses:
“The events of the past year have been characterized by significant volatility and exposure of vulnerabilities in the cryptoasset space. These events highlight some of the key risks associated with cryptoassets and cryptoasset industry participants that banking institutions should be aware of.”
Regulators claim that the cryptocurrency industry lacks maturity and robustness, which is another prerequisite for financial losses. They also insist that the industry is vulnerable to cyber attacks, while Bitcoin and alternative tokens may facilitate illegal activities due to the lack of proper regulations.
“It is important that unmitigated or uncontrolled risks associated with the crypto-asset sector are not transferred to the banking system. The agencies are monitoring banking organizations that may be exposed to risks from the crypto-asset sector and carefully reviewing any proposals for banking organizations to engage in activities involving crypto-assets,” the statement read.
The regulator noted that the numerous failed cryptocurrency projects last year harmed the industry as a whole. Given the risk of another entity failing in the near future, the regulator will continue to monitor the industry and advise participants on imminent risks.
FTX and other fallen giants
Terra’s failure is one of the examples that undermined the industry’s credibility in 2022. The project’s algorithmic stablecoin — UST — decoupled in May and subsequently fell to almost zero along with its native token LUNA. Sources revealed that some people committed suicide, which led to huge losses for investors.
Three Arrows Capital (3AC), Celsius Network, and Voyager Digital all felt the consequences of Terra’s collapse as they all experienced severe financial problems and had to file for bankruptcy.
However, arguably the most infamous collapse was that of FTX. The platform, one of the largest in the space, filed for bankruptcy protection in November after facing liquidity issues and failing to meet customer withdrawal requests.
Bahamian authorities arrested the exchange’s former CEO, Sam Bankman-Fried, and sent him to Fox Hill Prison on charges of fraud, money laundering, and several other crimes. He was later deported to the United States and released on $250 million bail just before Christmas.
SBF (as he is known) recently pleaded not guilty to criminal charges that he intentionally defrauded investors, and U.S. District Judge Lewis Kaplan set his trial date for October. He currently lives at his parents' home and must wear an electronic monitoring device. If convicted in subsequent proceedings, he could spend his life in prison.
