Banks should be more cautious on crypto contagion risks, U.S. regulators warn

Jan 3 (Reuters) - Banks should be more careful about the risks of fraud, legal uncertainty and misleading disclosures by crypto firms, U.S. regulators warned on Tuesday, just two months after the collapse of crypto exchange FTX stunned the financial world.

In their first joint statement on crypto, the Federal Reserve, Federal Deposit Insurance Corp (FDIC) and the Office of the Comptroller of the Currency (OCC) said they had concerns with the safety and soundness of bank business models that are highly concentrated in crypto.

Banks issuing or holding crypto tokens stored on public, decentralized networks are "highly likely" to be inconsistent with safe and sound banking practices, the regulators added, potentially dealing a blow to several lenders' ongoing efforts to provide crypto services to customers.

The statement comes after months of hesitancy from regulators to issue uniform guidance or rules on cryptocurrency, even as banks have expressed a desire for more clarity.

The OCC has previously said banks must obtain regulatory approval before engaging in certain crypto-related activities, such as holding tokens on behalf of clients, while the Fed has instructed banks to notify their supervisors before moving forward with any efforts involving crypto.

The regulators said they are supervising banks that may be exposed to crypto-related risks and are carefully reviewing bank proposals to engage in crypto activities, according to the joint statement.

“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 regulators said.

The pronouncement comes as digital asset companies reckon with high-profile collapses, most notably that of crypto exchange FTX. Founder Sam Bankman-Fried pled not guilty to eight criminal charges, including wire fraud and conspiracy to commit money laundering, in a Manhattan federal court on Tuesday.

The Fed, FDIC and OCC emphasized numerous risks associated with crypto, including the volatility of digital asset markets, contagion risk within the sector and weak risk management.

The regulators said they would issue further statements on banks' crypto-related activities as warranted and would continue to work with other agencies on crypto issues.