The crypto space received more regulatory attention through the end of 2022. The collapse of one of the largest global digital asset exchanges brought massive losses to the industry. This event spurred several watchdogs to express concerns and issue warning on cryptocurrency engagement.
Some US Federal regulators have recently commented on crypto activities’ risks. The watchdogs include the Federal Reserve, Federal Deposit Insurance Corp, and the Office of the Comptroller of the Currency (OFOC).
According to the report on Tuesday, January 3, 2023, some officials of the three regulatory agencies warned lenders about exposure to digital assets. They cited that the escalating risks should not extend to the banking system.
Regulators Cited Associated Risks With Crypto Engagement
The warning from the watchdogs is coming after the fall of the FTX digital asset exchange in 2022. Millions of customers lost their funds on the distressed platform, estimated to be more than 8 billion.
From their observations, the US regulators cited the high volatility and vulnerabilities seen in the cryptocurrency space last year. They noted the importance of hedging the banking system properly. This will ensure that the risks in the crypto space cannot extend to banks.
Also, the regulators highlighted some risks from digital asset involvement in the banking systems. These include fraud, scams, regulatory uncertainties with digital asset custody, platform vulnerabilities, ambiguous statements from companies, crypto contagions, and others.
As banking system regulators, the watchdogs pledged their undivided regulatory diligence. This means increased caution and stricter rules on banking organizations when it comes to digital exposure.
FTX Bankruptcy Created More Doubts
Before its implosion, FTX is rated among the leading crypto exchanges worldwide. It had millions of users and investors from different sectors.
Due to its bankruptcy, several individuals and firms exposed to the platform suffered huge losses. These outplay raised concerns and reactions both within and outside the digital space. As a result, US regulators have tightened their regulatory rules on digital activities.
As revealed in the bankruptcy filing, some small banks exposed to the exchange include Signature Bank and Silvergate. But the two banks reported that they had only a minimal portion of total deposits on the distressed exchange.
According to the US regulators, the broader financial system received less impact from the collapse of the FTX exchange. But the effect is still devastating for some individuals and firms that invested in the platform.
Hence, the US watchdogs are coming up with regulatory measures to avert future occurrences in the financial sector.