Yesterday, the three main US banking regulators, the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) issued a joint risk warning on crypto assets. Among a host of risks, regulators have warned banks against holding public blockchain crypto assets, including stablecoins.

While regulators have previously warned of the risks, there is an issue that may have affected the timing. Before Christmas, the global Basel Committee on Banking Supervision published the final Basel rules on crypto assets. While the rules are not particularly permissive, they are much more flexible than previous proposals. It is conceivable that US banking regulators wanted to emphasize that this does not mean that it is easy for banks to get involved in crypto.

Another timing issue is the November crash of crypto exchange FTX, which led to two banks needing to appease investors. Silvergate’s share price is down two-thirds, and the largest Signature Bank has less exposure to the cryptocurrency sector.

Public Blockchain Concerns

The Basel Committee’s definition of crypto assets includes cryptocurrencies but also digital securities, tokenized bank money and stablecoins. And the Basel rules noted that the issue of public blockchain risks could be reviewed.

Similarly, yesterday’s US regulator’s warning devoted an entire paragraph to the risks of public blockchains, including governance, lack of clearly established roles, vulnerabilities to cyberattacks, and risks of the trapped assets. He went on to say that the issuance or direct ownership of public blockchain crypto assets “is very likely to be inconsistent with safe and sound banking practices.”

Some institutions are becoming more interested in getting involved in public blockchains due to the relatively high rate of adoption and low barriers to entry, providing the potential for more liquid markets.

Meanwhile, the warning covered a variety of risks, including legal uncertainties regarding property rights, fraud risks, misrepresentation and volatility, and weak risk management within the crypto-asset sector.