US bank regulators on Tuesday said that cryptoassets and exposure present risks to lenders, urging organizations to ensure they manage the dangers.
The joint statement came after the sudden collapse of cryptocurrency platform FTX — worth US$32 billion before it filed for bankruptcy in November — which sent chills across the sector.
FTX’s disgraced founder Sam Bankman-Fried has since been accused of committing one of the biggest financial frauds in US history, sparking calls for greater oversight.
“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 US Federal Reserve, Federal Deposit Insurance Corp and the US Office of the Comptroller of the Currency said.
They added in a joint statement that events of the past year “have been marked by significant volatility and the exposure of vulnerabilities in the crypto-asset sector.”
Banking organizations should be aware of risks such as fraud and scams, along with inaccurate or misleading disclosures, the agencies said.
There is also “significant volatility” in cryptoasset markets, and contagion risk in the sector due to connections between parties — including through opaque lending, investing or funding.
The watchdogs said they continue to take a “careful and cautious approach” with crypto activities and exposure at banking organizations.
Meanwhile, lenders should “ensure appropriate risk management” such as board oversight and guardrails to identify and manage threats, the statement said.
FTX’s implosion was swift following a Nov. 2 media report on ties between it and Alameda Research, a trading company also controlled by Bankman-Fried.
The report exposed that Alameda Research’s balance sheet was heavily built on the FTT currency — a token created by FTX with no independent value — and exposed Bankman-Fried’s companies as being dangerously interlinked.
Separately, Bankman-Fried on Tuesday pleaded not guilty to US criminal fraud charges over the spectacular collapse of his crypto exchange.
The 30-year-old former digital currency billionaire, who is out on bail, entered the plea in federal court in Manhattan before New York Judge Lewis Kaplan.
He was arrested at his apartment in the Bahamas — where FTX is headquartered — on Dec. 12 at the request of the federal prosecutors in New York.
He spent nine days in prison in the island country before being extradited to the US, where he appeared in court last month. He was released on a US$250 million bail package that requires him to live at his parents’ home in California. He is also subject to electronic monitoring.
The US government has charged Bankman-Fried with conspiracy, wire fraud, money laundering and election finance breaches.
Prosecutors have alleged that he cheated investors and misused funds that belonged to FTX and Alameda Research clients.
Bankman-Fried pleaded not guilty to all eight counts against him — five of which carry a maximum sentence of 20 years in prison each.
Kaplan set a tentative date of Oct. 2 for the start of his trial.
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