American banking watchdogs warned domestic financial institutions that delving into the world of crypto could carry various risks, such as fraud.
The warning comes as a result of a catalytic 2022, which saw the demise of multiple cryptocurrency giants, including FTX, Terraform Labs, Three Arrows Capital, Celsius Network, and more. The collapse of those firms triggered multi-billion investor losses and infused panic in the industry, resulting in a massive market decline.
Beware of the risks
The Federal Reserve, Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency issued a joint statement, advising US banks to be utterly careful when dealing with cryptocurrencies because of the risks in the field. Monetary institutions could become victims of fraud and scams or be involved in collapsing projects, leading to severe losses:
“The events of the past year have been marked by significant volatility and the exposure of vulnerabilities in the crypto-asset sector. These events highlight a number of key risks associated with crypto-assets and crypto-asset sector participants that banking organizations should be aware of.”
The watchdogs claimed that the cryptocurrency industry lacks maturity and robustness, which is another prerequisite for financial damage. They also maintained that the sector is vulnerable to cyber attacks, while bitcoin and the alternative coins could facilitate illicit activities due to the absence of appropriate rules.
“It is important that risks related to the crypto-asset sector that cannot be mitigated or controlled do not migrate to the banking system. The agencies are supervising banking organizations that may be exposed to risks stemming from the crypto-asset sector and carefully reviewing any proposals from banking organizations to engage in activities that involve crypto-assets,” the statement reads.
The regulators noted that last year’s numerous failing cryptocurrency projects harmed the entire industry. Given the risks of seeing another collapsing entity in the near future, the watchdogs will continue overseeing the sector and advise participants about the imminent risks.
FTX and other falling giants
Terra’s failure is one of the examples from 2022 that undermined the industry’s credibility. The project’s algorithmic stablecoin – UST – de-pegged in May and later plunged to virtually zero together with the native token LUNA. This prompted massive investor losses as sources revealed that some individuals committed suicide.
Three Arrows Capital (3AC), Celsius Network, and Voyager Digital felt the consequences of Terra’s debacle as they all had severe financial issues and had to file for bankruptcy.
However, the most notorious collapse is arguably the one of FTX. The platform, which was among the largest in its field, filed for bankruptcy protection in November after facing liquidity issues and failing to honor customer withdrawal requests.
The Bahamian authorities arrested Sam Bankman-Fried – the former CEO of the exchange – and sent him to Fox Hill Prison on allegations of committing fraud, money laundering, and several other crimes. He was later deported to the US and released on a $250 million bond before Christmas.
SBF (as he is commonly known) recently pleaded not guilty to criminal charges that he knowingly defrauded investors, while US District Judge Lewis Kaplan set his trial date for October. He currently lives at his parent’s house and has to wear an electronic monitoring device. He could spend his life in jail if found guilty in the subsequent process.