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    US Banking Regulator warns about the “emerging risks” of cryptocurrencies

    The OCC (Office of the Comptroller of the Currency) remarked that the digital asset industry was evolving but it is “not yet robust” in its risk management.

    A US banking industry regulator warned the banks about the “emerging risks” of cryptocurrencies. They commented that the sector should take a “cautious approach” and seek for permission in some cases which is related to crypto or crypto firms.

    The Office of the Comptroller of the Currency (OCC) cited the “dislocations” in the crypto market of 2022, and highlighted that there are “several key risks” of crypto that are mentioned in the 8th December Semiannual Risk Perspective for Fall 2022 report.

    Its major concerns are about stablecoins which might not be stable, and the crypto industry which lacks mature risk management practices for which there is a high risk of contagion due to the “high degree of interconnectedness.”

    The crypto space lacks “consistent or comprehensive regulation” and it is quite volatile too with the increased range of firms offering “bank-like products and services” that is using tokenized assets and crypto, this is also considered a reason for concern. Thus, the OCC believes in raising questions regarding financial stability.

    In May, the algorithmic stablecoin TerraClassicUSD (USTC) collapsed and became depegged. This is a proof that stablecoins can “run risk,” and not only that, as a consequence of this incident, other asset-backed stablecoins too had to face minor depegs.

    This highlighted that since then stablecoin backings have evolved “incrementally”, but most of them still “remain susceptible to run risk.”

    On the topic of risk management, the OCC remarked that the practices of the crypto firms were maturing but they are still “not yet robust” as over the past year the firms are “unprepared for the stresses and surprises” and therefore millions of investors had to face the losses. They commented-

    Hacks and outages are frequent, and fraud and scams remain high throughout the industry. In some cases, ownership rights, custody arrangements, and financial representations have created a high degree of confusion.

    According to the OCC, the crypto market over 2022 has also disclosed that the industry is interconnected “through a variety of opaque lending and investing arrangements.” This means that the crypto participants “may be engaging in highly leveraged trading” which in turn is resulting in the observed contagion risk.

    Therefore, the OCC is advising the banks that institutions who are considering being associated with crypto or crypto companies “should take a careful and incremental approach.” They also advised the national banks that the plans which are related to crypto should be discussed “with their supervisory office” prior to becoming engaged in any activities because some potentially might require permission.

    After the catastrophic collapse of FTX, several crypto companies have moved to improve their transparency. While on the other hand, many exchanges are introducing proof-of-reserves so that the users can verify crypto backings along with conducting some public third-party audits.

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